Sold out

Discussion of the Gold portion of the Permanent Portfolio

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technovelist
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Sold out

Post by technovelist » Mon Mar 23, 2020 10:21 am

This is a new one: gold soaring and dealers don't seem to have any normal-sized coins or bars to sell.
Usually that happens when it is plunging.
Could this be the end of the paper gold era?
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Tortoise
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Re: Sold out

Post by Tortoise » Mon Mar 23, 2020 12:46 pm

technovelist wrote:
Mon Mar 23, 2020 10:21 am
This is a new one: gold soaring and dealers don't seem to have any normal-sized coins or bars to sell.
Usually that happens when it is plunging.
Could this be the end of the paper gold era?
My understanding is that in normal market conditions, the prices of paper and physical gold are kept in alignment through arbitrage. But during brief periods of extreme market volatility, presumably arbitrage is unable to work as efficiently due to lower liquidity.

If that's the case, then presumably the prices of paper and physical gold will come back into alignment when volatility drops back down to less extreme levels, allowing arbitrage to resolve the disconnects.

Is this sound logic?
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Re: Sold out

Post by pmward » Mon Mar 23, 2020 12:59 pm

Tortoise wrote:
Mon Mar 23, 2020 12:46 pm
technovelist wrote:
Mon Mar 23, 2020 10:21 am
This is a new one: gold soaring and dealers don't seem to have any normal-sized coins or bars to sell.
Usually that happens when it is plunging.
Could this be the end of the paper gold era?
My understanding is that in normal market conditions, the prices of paper and physical gold are kept in alignment through arbitrage. But during brief periods of extreme market volatility, presumably arbitrage is unable to work as efficiently due to lower liquidity.

If that's the case, then presumably the prices of paper and physical gold will come back into alignment when volatility drops back down to less extreme levels, allowing arbitrage to resolve the disconnects.

Is this sound logic?
Yes, performing arbitrage is not risk free. The paper is more liquid than the underlying asset, so you can be stuck holding the bag by trying to pick up pennies in front of the steam roller. This very scenario played out last week when the bond market went no bid and bond ETF's everywhere were trading at a discount to NAV (BND, one of the largest and most liquid bond ETF's in the world was trading at 6% discount to NAV! For those PP investors that want ultimate safety, bond ETF's have failed that test). The people that perform arbitrage get nervous when volatility increases and liquidity tightens. The spreads they're willing to arb widen until volatility comes back to normal.
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Re: Sold out

Post by Tortoise » Mon Mar 23, 2020 1:04 pm

pmward wrote:
Mon Mar 23, 2020 12:59 pm
Yes, performing arbitrage is not risk free. The paper is more liquid than the underlying asset, so you can be stuck holding the bag by trying to pick up pennies in front of the steam roller. This very scenario played out last week when the bond market went no bid and bond ETF's everywhere were trading at a discount to NAV (BND, one of the largest and most liquid bond ETF's in the world was trading at 6% discount to NAV! For those PP investors that want ultimate safety, bond ETF's have failed that test). The people that perform arbitrage get nervous when volatility increases and liquidity tightens. The spreads they're willing to arb widen until volatility comes back to normal.
So in other words, coin dealers being sold out of out coins, whether during a quickly rising or quickly falling paper gold price, is a temporary phenomenon that should end when volatility drops and liquidity returns, and it doesn't indicate "the end of the paper gold era," correct?
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Re: Sold out

Post by pmward » Mon Mar 23, 2020 1:09 pm

Tortoise wrote:
Mon Mar 23, 2020 1:04 pm
pmward wrote:
Mon Mar 23, 2020 12:59 pm
Yes, performing arbitrage is not risk free. The paper is more liquid than the underlying asset, so you can be stuck holding the bag by trying to pick up pennies in front of the steam roller. This very scenario played out last week when the bond market went no bid and bond ETF's everywhere were trading at a discount to NAV (BND, one of the largest and most liquid bond ETF's in the world was trading at 6% discount to NAV! For those PP investors that want ultimate safety, bond ETF's have failed that test). The people that perform arbitrage get nervous when volatility increases and liquidity tightens. The spreads they're willing to arb widen until volatility comes back to normal.
So in other words, coin dealers being sold out of out coins, whether during a quickly rising or quickly falling paper gold price, is a temporary phenomenon that should end when volatility drops and liquidity returns, and it doesn't indicate "the end of the paper gold era," correct?
Correct. As I mentioned, paper is more liquid than physical gold. So it's always going to be popular amongst institutions. But occasionally there are dislocations. There always will be in any derivative where the derivative is more liquid than the underlying asset. In these cases, it's the derivative market where the price discovery is truly happening (especially when those derivative markets are levered like gold futures and options markets), and the gold asset itself has to play catch up as it is not as liquid.
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Re: Sold out

Post by pugchief » Mon Mar 23, 2020 1:39 pm

pmward wrote:
Mon Mar 23, 2020 12:59 pm

Yes, performing arbitrage is not risk free. The paper is more liquid than the underlying asset, so you can be stuck holding the bag by trying to pick up pennies in front of the steam roller. This very scenario played out last week when the bond market went no bid and bond ETF's everywhere were trading at a discount to NAV (BND, one of the largest and most liquid bond ETF's in the world was trading at 6% discount to NAV! For those PP investors that want ultimate safety, bond ETF's have failed that test). The people that perform arbitrage get nervous when volatility increases and liquidity tightens. The spreads they're willing to arb widen until volatility comes back to normal.
Did that happen to ETFs that are essentially 100% Treasuries like TLT?

Most of my bond holdings are in Fidelity mutual funds where I assume this is a non-issue.
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Re: Sold out

Post by pmward » Mon Mar 23, 2020 1:50 pm

pugchief wrote:
Mon Mar 23, 2020 1:39 pm
pmward wrote:
Mon Mar 23, 2020 12:59 pm

Yes, performing arbitrage is not risk free. The paper is more liquid than the underlying asset, so you can be stuck holding the bag by trying to pick up pennies in front of the steam roller. This very scenario played out last week when the bond market went no bid and bond ETF's everywhere were trading at a discount to NAV (BND, one of the largest and most liquid bond ETF's in the world was trading at 6% discount to NAV! For those PP investors that want ultimate safety, bond ETF's have failed that test). The people that perform arbitrage get nervous when volatility increases and liquidity tightens. The spreads they're willing to arb widen until volatility comes back to normal.
Did that happen to ETFs that are essentially 100% Treasuries like TLT?

Most of my bond holdings are in Fidelity mutual funds where I assume this is a non-issue.
Yes it did. Equity ETF's were ok, but stocks are just as liquid as the ETF's that track them. The treasury only ETF's were not hit as hard as ones that incorporate corporate bonds though. I personally would recommend against bond ETF's because of this for anyone that wants to be able to get full NAV for bond holdings in a crisis. Bond ETF's always go back to NAV eventually, which today the Fed stepping up as buyer of last resort for all bonds allowed the ETF's to all go back to NAV today. Mutual funds were not as effected since they only trade once per day, they didn't have the intraday pressures ETF's had (and mutual fund holders don't trade as often as ETF holders).
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Re: Sold out

Post by kwg2005 » Sat Mar 28, 2020 7:16 am

I notice people calling gold ETFs paper gold. I always thought these gold ETFs store real gold in a vault. My thought on the shortage of gold coins is that maybe mom and pops are going to their coin dealer to buy gold due to the massive money printing that's happening, but the coin stores didn't have a lot of supply because they didn't anticipate this. I noticed that APMEX is selling gold and silver coins well above their spot price. I wonder how much of gold is actually in gold coins? I would think a lot of it would be in big bars at central banks and vaults for ETFs and the like, so part of the lag could be manufacturing enough coins. I also noticed that many bond ETFs have fallen below their NAVs recently. That is discouraging and make me want to switch back to Mutual Funds for my bonds. I'll wait for when things aren't so volatile to do so. Correct me if I'm wrong, but I think that the ETFs are selling and the APs are trying to sell the underlying bonds but there are no buyers. It's hard to find the market price of something without buyers. Won't mutual funds have the same problem, except that the problem is delayed a day? For example, Tom sells shares of his bond mutual fund and is paid out the NAV of the fund. The next business day the fund sells the bonds (assuming there's a net redemption of the fund) but it can't sell? My guess is they do sell at whatever price they get and the hit is to the current owners of the mutual fund. I'm interested in your responses to my thoughts and if I'm wrong on anything please let me know. I'm interested in learning as much as possible!
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Re: Sold out

Post by technovelist » Sat Mar 28, 2020 8:43 am

kwg2005 wrote:
Sat Mar 28, 2020 7:16 am
I notice people calling gold ETFs paper gold. I always thought these gold ETFs store real gold in a vault.
That's what the ETF managers claim.
kwg2005 wrote:
Sat Mar 28, 2020 7:16 am
My thought on the shortage of gold coins is that maybe mom and pops are going to their coin dealer to buy gold due to the massive money printing that's happening, but the coin stores didn't have a lot of supply because they didn't anticipate this. I noticed that APMEX is selling gold and silver coins well above their spot price. I wonder how much of gold is actually in gold coins? I would think a lot of it would be in big bars at central banks and vaults for ETFs and the like, so part of the lag could be manufacturing enough coins.
I don't think that's the problem because gold bars are also in short supply, at least those smaller than 100 oz. sizes. I don't think too many mom and pop purchasers buy kilo bars.
kwg2005 wrote:
Sat Mar 28, 2020 7:16 am

I also noticed that many bond ETFs have fallen below their NAVs recently. That is discouraging and make me want to switch back to Mutual Funds for my bonds. I'll wait for when things aren't so volatile to do so. Correct me if I'm wrong, but I think that the ETFs are selling and the APs are trying to sell the underlying bonds but there are no buyers. It's hard to find the market price of something without buyers. Won't mutual funds have the same problem, except that the problem is delayed a day? For example, Tom sells shares of his bond mutual fund and is paid out the NAV of the fund. The next business day the fund sells the bonds (assuming there's a net redemption of the fund) but it can't sell? My guess is they do sell at whatever price they get and the hit is to the current owners of the mutual fund. I'm interested in your responses to my thoughts and if I'm wrong on anything please let me know. I'm interested in learning as much as possible!
I wouldn't own any bonds at all other than Treasurys in this climate. No one knows who is going under, regardless of how much funny money they print (hint: we know it is multiple trillions).

Of course Treasurys are now in negative yield territory but it's a tiny bit negative.
I'm beginning to think my "tech-dumbell" portfolio (~2/3rds gold and ~1/3 Treasurys) may be close to optimal prospectively in this insane climate.
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Re: Sold out

Post by pmward » Sat Mar 28, 2020 9:08 am

kwg2005 wrote:
Sat Mar 28, 2020 7:16 am
I notice people calling gold ETFs paper gold. I always thought these gold ETFs store real gold in a vault. My thought on the shortage of gold coins is that maybe mom and pops are going to their coin dealer to buy gold due to the massive money printing that's happening, but the coin stores didn't have a lot of supply because they didn't anticipate this. I noticed that APMEX is selling gold and silver coins well above their spot price. I wonder how much of gold is actually in gold coins? I would think a lot of it would be in big bars at central banks and vaults for ETFs and the like, so part of the lag could be manufacturing enough coins. I also noticed that many bond ETFs have fallen below their NAVs recently. That is discouraging and make me want to switch back to Mutual Funds for my bonds. I'll wait for when things aren't so volatile to do so. Correct me if I'm wrong, but I think that the ETFs are selling and the APs are trying to sell the underlying bonds but there are no buyers. It's hard to find the market price of something without buyers. Won't mutual funds have the same problem, except that the problem is delayed a day? For example, Tom sells shares of his bond mutual fund and is paid out the NAV of the fund. The next business day the fund sells the bonds (assuming there's a net redemption of the fund) but it can't sell? My guess is they do sell at whatever price they get and the hit is to the current owners of the mutual fund. I'm interested in your responses to my thoughts and if I'm wrong on anything please let me know. I'm interested in learning as much as possible!
The ETF's track the price of the standard 400 oz London bars. This is the true price of gold. This is the price that all the big institutions use for gold. Retail coins are NOT the true price of gold. Retail coins have middlemen that need to pay for hedges, business expenses, and profit from the transaction. Each of these things increases the price of coins. Also, the rarity of coins comes into play as well. Obviously as you can see, lately coins have been sold out everywhere, so these coin dealers can further rip people off by gauging them due to the limited availability of the coins.
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Re: Sold out

Post by technovelist » Sat Mar 28, 2020 9:17 am

pmward wrote:
Sat Mar 28, 2020 9:08 am
kwg2005 wrote:
Sat Mar 28, 2020 7:16 am
I notice people calling gold ETFs paper gold. I always thought these gold ETFs store real gold in a vault. My thought on the shortage of gold coins is that maybe mom and pops are going to their coin dealer to buy gold due to the massive money printing that's happening, but the coin stores didn't have a lot of supply because they didn't anticipate this. I noticed that APMEX is selling gold and silver coins well above their spot price. I wonder how much of gold is actually in gold coins? I would think a lot of it would be in big bars at central banks and vaults for ETFs and the like, so part of the lag could be manufacturing enough coins. I also noticed that many bond ETFs have fallen below their NAVs recently. That is discouraging and make me want to switch back to Mutual Funds for my bonds. I'll wait for when things aren't so volatile to do so. Correct me if I'm wrong, but I think that the ETFs are selling and the APs are trying to sell the underlying bonds but there are no buyers. It's hard to find the market price of something without buyers. Won't mutual funds have the same problem, except that the problem is delayed a day? For example, Tom sells shares of his bond mutual fund and is paid out the NAV of the fund. The next business day the fund sells the bonds (assuming there's a net redemption of the fund) but it can't sell? My guess is they do sell at whatever price they get and the hit is to the current owners of the mutual fund. I'm interested in your responses to my thoughts and if I'm wrong on anything please let me know. I'm interested in learning as much as possible!
The ETF's track the price of the standard 400 oz London bars. This is the true price of gold. This is the price that all the big institutions use for gold. Retail coins are NOT the true price of gold. Retail coins have middlemen that need to pay for hedges, business expenses, and profit from the transaction. Each of these things increases the price of coins. Also, the rarity of coins comes into play as well. Obviously as you can see, lately coins have been sold out everywhere, so these coin dealers can further rip people off by gauging them due to the limited availability of the coins.
I'm not sure how coin dealers are "gauging" people by being out of stock so they can't sell anything. How do they profit from that?
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Re: Sold out

Post by pmward » Sat Mar 28, 2020 9:19 am

technovelist wrote:
Sat Mar 28, 2020 9:17 am
pmward wrote:
Sat Mar 28, 2020 9:08 am
kwg2005 wrote:
Sat Mar 28, 2020 7:16 am
I notice people calling gold ETFs paper gold. I always thought these gold ETFs store real gold in a vault. My thought on the shortage of gold coins is that maybe mom and pops are going to their coin dealer to buy gold due to the massive money printing that's happening, but the coin stores didn't have a lot of supply because they didn't anticipate this. I noticed that APMEX is selling gold and silver coins well above their spot price. I wonder how much of gold is actually in gold coins? I would think a lot of it would be in big bars at central banks and vaults for ETFs and the like, so part of the lag could be manufacturing enough coins. I also noticed that many bond ETFs have fallen below their NAVs recently. That is discouraging and make me want to switch back to Mutual Funds for my bonds. I'll wait for when things aren't so volatile to do so. Correct me if I'm wrong, but I think that the ETFs are selling and the APs are trying to sell the underlying bonds but there are no buyers. It's hard to find the market price of something without buyers. Won't mutual funds have the same problem, except that the problem is delayed a day? For example, Tom sells shares of his bond mutual fund and is paid out the NAV of the fund. The next business day the fund sells the bonds (assuming there's a net redemption of the fund) but it can't sell? My guess is they do sell at whatever price they get and the hit is to the current owners of the mutual fund. I'm interested in your responses to my thoughts and if I'm wrong on anything please let me know. I'm interested in learning as much as possible!
The ETF's track the price of the standard 400 oz London bars. This is the true price of gold. This is the price that all the big institutions use for gold. Retail coins are NOT the true price of gold. Retail coins have middlemen that need to pay for hedges, business expenses, and profit from the transaction. Each of these things increases the price of coins. Also, the rarity of coins comes into play as well. Obviously as you can see, lately coins have been sold out everywhere, so these coin dealers can further rip people off by gauging them due to the limited availability of the coins.
I'm not sure how coin dealers are "gauging" people by being out of stock so they can't sell anything. How do they profit from that?
When they do get stock and put on a crazy spread... as they have been lately... it is gauging.
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