Junior Gold Miner ETF Suspends Creation Orders Due To Shortage Of Underlying Instruments

Tyler Durden's picture

Over the last several weeks, two years after Howard Marks first brought attention to the topic with a letter in which he asked "What Would Happen If ETF Holders Sold All At Once?" some investors have once again quietly voiced concern about the inordinate and rising influence passive investing in general, and ETFs in particular, exert on stocks but especially on fixed income securities, including illiquid bonds and loans. To address some of these concerns, earlier last week, Goldman Sachs released a report titled "A closer look at years of passive (aggressive) investing in credit" in which it observed that the growth patterns shown in Exhibits 1 to 3, particularly the increase in the ownership share of ETFs...

.... have consistently raised concerns among fixed income investors and regulators. The fear is that the combined effect of the "liquidity mismatch" inherent to ETFs and a potential abrupt reversal of the inflows of the past several years could prove damaging to the secondary market. In February 2013, then Fed Governor Jeremy Stein echoed these concerns, pointing specifically to the growth of corporate bond ETFs: “If investors in these vehicles seek to withdraw at the first sign of trouble, then this demandable equity will have the same fire-sale-generating properties as short-term debt.”

Stein's concern was proven to be warranted two years later, in August 2015 when a wholesale "glitch" in ETF liquidity caused the infamous flash crash which led to a partial market shutdown, and the VIX going offline for over half an hour.

Another frequently encountered narrative, Goldman notes, is that ETF inflows, the process through which new shares are created, exert decent technical pressure on secondary market prices and liquidity.

Goldman's conclusion was that while concerns are indeed growing, especially in the area of junk bonds, where there has been a pickup in flow volatility in recent months, for now there is no indication that ETF clustering could result in the kind of dramatic firesales witnessed by the market in the summer of 2015.

Perhaps Goldman is right and indeed, so far there have been no major, public dislocations in the ETF creation/redemption process, although it is safe to say that nobody has tested the ETF, and passive investing, paradigm in a world in which global liquidity is declining, as many believe will happen soon. After all, ETFs did not become a dominant market force until after central banks took over the market in 2008/2009. As such, their success may be explained in big part by the liquid generosity of over $18 trillion central bank liquidity.

However, while equity and credit ETFs have been relatively blemish-free, at least in the post August 2015 period, commodity funds have seen their share of snafus. In fact, just this past Thursday, the Direxion levered junior gold miner ETF, the JNUG, announced it was suspending daily creation orders.

While details are scarce, according to Direxion, the 3x levered cousin of the GDXJ, announced on Thursday after the close, that "effective immediately, daily creation orders in the Direxion Daily Junior Gold Miners Index Bull 3X Shares leveraged exchange traded fund (Ticker: JNUG) are temporarily suspended until further notice."

The stated reason: suspension is due to the limited availability of certain investments or financial instruments used to provide requisite exposure to the MVIS Global Junior Gold Miners Index. Redemption orders for the Fund will not be affected, and will continue to be accepted in the ordinary course of business. 

As a reminder, ETF shares are created when an “authorized participant” deposits a daily “creation basket” (or cash) with the ETF. An authorized participant is typically a large institutional investor, such as a broker-dealer, that enters into a contract with an ETF to allow it to create or redeem shares directly with the fund. The authorized participant does not receive compensation from the ETF or the ETF sponsor for creating or redeeming ETF shares. Meanwhile, "a creation basket" is a specific list of names and quantities of securities or other assets that may be exchanged for shares of the ETF. The creation basket typically either mirrors the ETF’s portfolio or contains a representative sample of the ETF’s portfolio. The contents of the creation basket are made publicly available on a daily basis.

In return for the creation basket or cash (or both), the ETF issues to the authorized participant a “creation unit,” a large block of ETF shares (generally 25,000 to 200,000 shares). The authorized participant can either keep these ETF shares or sell some or all of them on a stock exchange.

For whatever reason, as of Thursday the above process for JNUG is now halted, and as Direxion notes, "should demand exceed supply during the period that creation units are limited, the fund could trade at a premium to its net asset value (NAV). This suspension does not impact the ability of investors to trade shares of the fund on stock exchanges."

And while this makes intuitive theoretical sense, what may be really going on here practically?

There is no immediate answer. A quick look at this ETF, which like all other highly levered ETFs has a huge theta, and has seen its nominal value collapse over the years, has also seen a dramatic increase in its outstanding shares in recent months, in a repeat of what happened to various levered VIX ETFs one year ago, as investors have rushed to gain the most levered possible exposure to further gold upside.

A quick look at the performance of three linked assets in the past week shows additional decouplings: gold (+2.5%), GDX (+4.4%), and GDXJ (-0.03%).

* * *

One idea voiced by "Tech Strategist" Fred Hickey is that the GDXJ ETF has seen so much demand since the recent gold bull market began 15 months, ago that it has had trouble buyiing enough Juniors that meet its criteria. Furthermore, GDXJ ownership positions ran up so high in several core names (approaching a 20% threshold) that it could effectively buy no more, going back to the original issue of ETF creation being limited by endogenous liquidity and stock technicals. 

Hickey further notes that differences around the GDX/GDXJ ratio in the last week were probably due to a rebalancing, but he claims there is "no getting around GDXJ has had shortages of junior miners."

For now it is unclear if the JNUG suspended due to an investor stampede into the ETF in the last few days of the week as gold broke out, or there is simply a liquidity constraint. Both may be relevant.

Keep an eye on gold, especially as it now approaches a key breakout level.

If investors are limited in how they can allocated capital to the yellow metal, it is possible there will be fireworks.

And finally, if gold creation is about to surge, does that mean that the Redemption process for all other, non-gold ETFs is about to be impacted as well? After all, a breakout in gold would imply broad selling of all risk assets.

We look forward to the answer, however here, once again, is Fred Hickey, who muses "Imagine the turmoil in the overpriced general stock market when ETF selling begets more selling." Conveniently, we don't even have to imagine - we just have to remember what happened on August 24 of 2015 and magnify it several times for dramatic impact..

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remain calm's picture

Canary in the GOLD mine

Harlequin001's picture

Well obviously the price of it is going to plunge now then isn't it?

Because that's what happens when there is a shortage iof something, like pms...

Pairadimes's picture

The Central Bank Reflation Failure Crash, when it finally arrives, is going to be something to see. 

Don't he holding 1's and 0's when it happens.

samiam6's picture

against my better judgment, i own a lot of jnug. murphy's law would suggest that no matter what this article infers, jnug will go down accordingly. my apologies in advance for the big ol' nothingburger to take place in the coming weeks. :-p

The_Juggernaut's picture

Volatility in a triple-levered junior miner fund?  Who could have seen that coming?

SomethingSomethingDarkSide's picture

MWAHAHAHAHAHAHAHAHAHA - yesss, come to The Dark Side!!!

Shorts are FUCKED, gold is going to the moon, and I'm gonna make so much money my face is going to melt off.

Let me take this time to say:  Fuck ShepWave.  Very much.

The_Juggernaut's picture

I can't wait to see the fuckers shorting NAK get squeezed.

ZeroPointOn's picture
ZeroPointOn (not verified) The_Juggernaut Apr 16, 2017 4:16 AM

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... http://bit.ly/2jdTzrM

Winston Churchill's picture

Counterparties on the leverage pulling out.

Somebody has gotten a heads up, I hope.

Seasmoke's picture

As good as Gold. 

loves the truth's picture

that figures, I own a bunch of JNUG.. I was wondering why GDXJ was lagging the rest of the miners on Friday

man from glad's picture

Just buy the real stuff and not the paper.

The_Juggernaut's picture

If you want to own a gold mine, your options are paper or a pick and shovel.

1.21 jigawatts's picture

"Underlying Instruments"

I thought they meant printer ink when I read it.

29.5 hours's picture

"gold ... approaches a key breakout level"

Wow. Never heard that before...

 

A82EBA's picture

this time is different :)

pocomotion's picture

Do I short Gold now? 

remain calm's picture

"Yes, Short Gold and go long TSLA. You are now appropriately diversified and hedged" Jim Cramer

DirkDiggler11's picture

Just ask the investors in Elemental Metals about holding Phyzz vs paper ....

83_vf_1100_c's picture

  It looks scary for the fools who have physical stored in an Elemetal vault. Odd concept but then people keep large sums of fiat in banks, still. The rabbit hole runs deep. Elemetal, Provident, NTR, OPM, maybe DGSE, Scotia Bank and doubtless others are  tighter than Alabama redneck cousins. Offices were closed Friday, we'll see if they reopen on Monday. The refineries at Elemetal and their subsidiaries are shut down. Replies from customers worried about their stored AU/AG are not happening. This is big news if you love the shiny. Refineries shutdown means an upcoming phyzz supply crunch. Next week will be interesting.

  If you are planning an order do the research. I have done a lot of orders with Provident but done with them til this shakes out fully. Off to investigate JM Bullion and APMEX and see what connection they have with the Elemetal hydra.

 

Nobodys Home's picture

I looked into Elemetal storage through Provident. Decided I like it stored where I can get my hands on it. I'm glad I did.

I've done a lot with Provident and JM. JM usually has a lower price on what I like to buy and similar service so I only use them now. I didn't like Apmex. 1 order and never again. High prices and mediocre service.

Xploregon's picture

Can anyone simplify this regarding GDXJ? I thought they were dumping some of their underperforming Juniors and (somehow) bringing in some GDX miners to essentially prop-up or raise the value of GDXJ? Mining ETF's arn't a pool I swim in but, I've been strongly considering it depending upon how much fiat Uncle Sam leaves me after Tuesday.

Pellegrino's picture

JNUG has a bunch of GDXJ (10M+ shares) plus a ton of GDXJ swaps. 

http://www.direxioninvestments.com/products/direxion-daily-junior-gold-m...

I'm curious what this suspension will do to juniors and GDXJ. I hold AGI, HMY, etc--and some of them went a little wacko friday. Also note that Direxion is doin a 4 for 1 reverse stocl split May 1.

 

paint it red call it hell's picture

Reads like a cover story for the simple greed of those who happen to be in the know.

mosfet's picture

Anyone who thinks that going from an unlimited supply of paper to a finite supply/demand model is bearish, shouldn't be holding physical either.  That said, when Direxion eventually resumes unlimited share creation, the price will snap back. 

This is what happened to TVIX when they suspended share creation...

A 89% price increase vs other Vix ETF's

https://ibb.co/kE5gY5

That said, I wouldn't be surprised to see JNUG dip early Monday, to scare as many weak hands out before the rally starts.  Although share creation for JDST won't be suspended (i.e. you could see both go up at times), I'd be very worried about being short going into next week, given a finite supply of JNUG, Gold in an uptrend with economic/war risks.  Unsure how this will affect GDXJ or GDX (which GDXJ holds a large stake in) but my guess is that it'll be bullish for both because a rapid price increase in JNUG will likely bring in momentum traders.

BTW The chart above, where ZH shows shares outstanding vs price is plain biased.  They intentionally used a multi-year chart across a sustained Gold bear market; knowing full well that 3X ETF price always decays substantionally over a multi-year timespan.  If you used a YTD chart it'd present a different picture - The number of shares falling well below current JNUG price. i.e Increasing scarcity with a sudden suspension of unlimited shares available for purchase.  You do the math.

TheLastTrump's picture

I've been playing JNUG and JDST for a month. 6 trades closed, all profitable. Highly unusual for me lol. Sell JNUG, buy JDST & vice versa. I wouldn't want to get stuck in JDST right now, if there's another Syrian/Nork flareup. TRADE SMALL.

Al Huxley's picture

Fully agree with your assessment, except for the possibility of JNUG dipping Monday.  They did the dip on Thursday, the announcement being conveniently after market close and before a long weekend, and I think this explains the otherwise inexplicable weakness of the juniors on Thursday when the action in gold and the pop on Wednesday would have dictated a strong continuation rally on Thursday.

Never underestimate the amount of fuckery that goes on in this sector.  All those JNUG shares, now the ONLY JNUG shares - bet you most are owned by appropriately connected insiders.  The whole fucking junior (and senior for that matter) market could be bought up by one or two ultrawealthy 'investors' ( or shitheads, as I prefer to call them).  So the 'market' moves contrary to any reasonable expectations, with the sole aim of fucking over the earnest, honest retail investor, and the typically less earnest, honest 'goldbug speculator', screwing them on the way up and down.

But someday (maybe it's now) these cunts are going to pull the trigger and let the whole sector run (after they've bought it up) and then there are going to be some fireworks.

ParkAveFlasher's picture

I need to add to this, that since Nov 2015 many of these juniors put up 3- and 4- baggers before recent-enough pullbacks.  So there is only so much shenanigazation that the physics of wealth can possibly bear, before the shenanigans stop.

Golden Showers's picture

No worries. You can still new jack swing on my nutz free of charge.

opaopaopa's picture

get the NUGT while you still can

Fisherman Blue's picture

Loaded up need it to go to $55.00

Silver Savior's picture

I would like to see what the fiat value of real gold and silver  would be without all the Etf garbage bullshit and all other paper metal crap. I still would not trade any for fiat I just want an idea of where I would stand. I would automatically be a member of the one percent for sure.

TheLastTrump's picture

Coincidentally, I went all in on one account in JNUG on Thursday. Was going to buy more in another account Monday after settle. This....looks kind of good. :)

 

Direxion notes, "should demand exceed supply during the period that creation units are limited, the fund could trade at a premium to its net asset value (NAV). This suspension does not impact the ability of investors to trade shares of the fund on stock exchanges."

duck dodgers's picture

Might be a tell that JNUG was down more than 10% thursday and continued to fall after the news. One thing Ive learned trading JNUG is that when a trade looks super obvious it almost always goes the other way. Call me crazy but Im short PMs here...very short term at least. Bullish long term

Fisherman Blue's picture

I knew something was strange Thursday. Hope the JNUG blow the shorts to hell next week.

rbianco3's picture

Is it possible physical could be pulled down with ETF's?

Or is it more likely that physical will continue to decouple from paper instruments?

Conax's picture

Everything is bad for real gold until it isn't.

I wish I understood this baffling article, then I too could be a playuh.

Josephuskek's picture

There is a lot of uncertainty right now with gold.  But in the long run it will be good. buy on dips is what i say

mosfet's picture

My impression is that Comex/LBMA futures traders could care less about ETF's while those ETF's care a whole lot about 'front-running' (not following) those futures traders.

Maestro Maestro's picture

Worse than the bankers rigging gold and silver prices and not having the gold that they sold you (or selling gold that they don't have, via fraudulent COMEX Futures contracts) is the fact that we don't even have MONEY today.  Therefore all financial transactions and economic numbers predicated on the existence of money are FRAUD and FORGERIES presently.

Electronic digits and paper fiat currencies in use today are NOT money, according to the law of the country that issues the reserve currency of the world, the US Dollar (Article 1, Section 10 of the US Constitution); or by the tenets of the science of Economics (i.e., fiat currencies are not money because they are not a store of value nor a unit of account due to the fact that NOT ONE fiat currency's value is actually determined or stipulated in concrete legal terms).  Dollars and Euros and Yens are not even lawfully DEFINED as to what they all are exactly; what their economic worth and transactional value is. Hence, fiat currencies simply cannot constitute the legal foundation of any lawful contract!

(Also, there cannot be either inflation nor deflation in the ABSENCE of money.  Both inflation and deflation are monetary events which cannot take place where there literally is no money.)

What we have today is massive GLOBAL FRAUD mascarading as a monetary system based on the (fraudulent) US dollar because all fiat currencies are basically only a derivative of the US dollar, including the Euro, the Yen, the Yuan, the Rouble, the Shekel and the Riyal.

Furthermore,

Why do a few people get the right to print fake fiat money out of nothing and buy your goods and services with it whereas you have to WORK to obtain the same worthless money created out of nothing?

THAT is the question at the heart of the matter.  That the bankers manipulate interest rates or the price of gold via fraudulent Futures trading (by selling gold that they don't have) with fiat money is a moot point.

To put it differently: why do the bankers get to have anything that they want without working for it and you, you don't?

All this talk about market rigging, monetary theory and fraudulent (paper) gold trading is a cover-up for INJUSTICE.

The US Constitution FORBIDS the use of debt as money; the US Constitution proscribes (debt) notes which is what the US dollar is presently.  Think, all other currencies are just another name for the US Dollar.

What passes for money today is a CRIME, no more no less.

 
People,

You are all aiding and abetting this crime every time you buy, sell, pay or get paid.

And then you ask, Why our leaders, the politicians, the bankers, and our military men and women are EVIL?

The answer is, because they are just like YOU. They are your sons and daughters.

Patriotico's picture

This is freaky. THe analysts from shepwave did an update on the miners on Thursday evening. It is like they knew something was going down. I have to admit they have been making some calls that no one else seems to even be the slightest bit clueless.  They put their money where their mouth and are not full of emotion and are not a hits mill just trying to get eyes on them.  

 

Some of their past charts and trades they show in their blog and in their Fb page 

https://www.facebook.com/166578775325/photos/a.10153488951800326.1073741827.166578775325/10154415124400326/?type=3&theater 

Marilee's picture

It is freaky as you say. They seem to get advance notice of any new event that could move the marketes.  I think it is from their connections that they still have at Goldman Sachs.  That is my theory anyway. There is no way any analyst is actually that good. They have been too dead spot on for too long in too many different things. 

SlothHedge's picture

Did you just see the news. Read the top headline in ZH.  N korea is doing this stuff now.  I think the wavers will be wright this week.  

NoDecaf's picture

slothHedge ... 11 weeks here

 

this another one of the fraudsters accounts

 

 

shepwave is a scam.

penneyed's picture

I am fairly new on hedge but I think you have an obsessoin with this shepwave stuff. you may want to  seek  therapy.