rick ferri on gold

[christina]

Hi,
I just listened to Craigr's podcast with Rick ferri. In it, Rick Ferri said something that scared me a little. He said (roughly) that gold is now an equity (because it's easily tradable as an ETF on the stock market) and therefore won't move in the predictable pattern we've been used to. He says that gold has been moving WITH the stock market. It is highly correlated with the stock market, as evidenced by the fact that stocks and gold have both been going up together.

My initial impression was that this was really bad for PP, and what am I doing with all this gold? Am I crazy?

But then I thought about it a little more, and I think that the inverse correlations might be a red herring.
The reason you have gold is because it will reliably go up in inflationary times. During non-inflationary times, gold is unpredicable--it might go up with stocks, it might not. Who knows. We hold other asset classes for non-inflationary times.

So the fact that gold is going up today, with no inflation, is just a bonus for PP, but we shouldn't count on this behaviour in the future.


Does my logic seem sound?

[moda0306]

Does that mean long-term bonds are an equity because we have TLT?

Yes, any breakdown of these ETFs will cause big problems that physical bonds or gold wouldn't be subject to.

Yes, ETF's have probably given a lot of people access to gold in ways they wouldn't have felt comfortable getting it before, and therefore increased ownership, and had an effect on price.

But I don't think that means gold is "broken."

[stone]

Christina, gold seems in the short term to sometimes be used as a "risk off" safe haven and move opposit to stocks (as happened during the summer) and sometimes get used as a "risk on" asset along with stocks (as since the big gold correction recently). LTT seem to pick up the batton of being the safe haven when gold isn't used for that. That is just the hour by hour day by day movement. The year by year movement seems more rational with gold protecting against interest rates being below inflation (negative real rates) and against currency depreciation.
To my mind the PP can be thought of as 25% stocks: 75% "money" with the "money" being in its three most divergent forms so as to ensure that there is always a form that retains its value to buffer the stocks against. Any of the four PP components can in certain circumstances loose value together. The hope is that they never will all at the same time and that one or other of them will do  well when the others do badly.

[MediumTex]

Don't listen to Rick Ferri when it comes to gold or the PP.

I believe that the PP is just too subtle a concept to register on Rick Ferri's mainstream equity oriented mental instrumentation.  I don't mean to suggest that his mental instrument panel is defective; rather, it's just not optimized to fully grasp the counterintuitive nature of the PP.  I believe that he senses the "counterintuitive-ness" of the PP, and his response is that such a thing could never work (or if it did work it was just a fluke), and he stops there.

Rick Ferri would do well to admit that there are some things in this world that he simply doesn't understand, and gold and the PP are two of them.

[Gumby]

I think it's fair to say that there is a lot about Gold that Rick Ferri does not understand. Even nobel prize winning economists (read Krugman) have only been able to hypothesize on why Gold has gone up during deflation.

As far as I know, normal intraday trading of a Gold ETF, such as GLD, does not affect the price of Gold. Rather, ETFs like GLD are arbitraged to match the price of Gold. When you buy or sell a share of GLD you are simply exchanging it with someone else for its market price. No gold changes hands and the gold market doesn't know about the buy/sale. However, if there is too much demand (or too little demand) for the shares of GLD, then the supply of GLD's gold holdings has to change, and an authorized dealer goes out and makes the sale/delivery with the open gold market. That's the only time GLD actually affects the market. The problem is that GLD now has so much gold, that some people believe it is a ticking time bomb of some kind. Theoretically, if every owner of GLD hit the sell button at the same time, the ETF would have to dump a hundreds of tons of Gold onto the market. Of course, you could probably say the same thing about any and every asset in the investment world.

There are times when Gold closely correlates with stocks, and there are times when it negatively correlates with stocks. And most of the time it correlates with nothing. So, I don't think we need to worry about Gold being correlated with stocks. If you look at a long term comparison of GLD vs Stocks, you will see that there is a huge difference between gold and stocks.

[Gumby]

Speaking of which...

Have you noticed the skyrocketing price of gold today?

http://www.kitco.com/images/live/gold.gif

The Bank of Japan announced that it is going to consider additional monetary easing (i.e. printing) and twisting to devalue the Yen, big time. And up until a few minutes ago, the Yen was considered to be a safe place to stick your money if you wanted a currency that doesn't really ever lose value. Oddly, Rick Ferri doesn't really seem to even grasp that Gold is considered a form of currency diversification. He just thinks that Gold is a stupid metal that's only worth what people say it is. Tell that to the traders and buyers who just exchanged buckets of fiat cash for Gold today.

[stone]

Gumby, I've been impressed by how closely the gold etfs do track the gold price hour by hour. The structure of them has worked well so far hasn't it? Do inflows and outflows of gold from etfs really not move the gold market? If GLD is developing an intra-day premium, don't bullion dealers take that as a portent of GLD being about to buy a load more gold? Also is the intraday wiggling of stock indexes and gold price driven by the futures traders? I'm totally clueless about how all of this works. I have heard that a private optical cable is being layed between Chicago and NewYork so as to more quickly align the futures market and the stock market.

[Indices]

He has a basic point. If the stock market were to shut down trading because of some catastrophe as it has in the past, then share you own of a Gold ETF or a Bond ETF would be gone. That is why it is best to own as much of the underlying security/commodity as possible. An ETF is a middleman at the end of the day, and that can cause trouble.

[stone]

It is gold options expiry day tomorrow. I wonder whether that Yen mediated gold boost will get firmly smacked down tomorrow. The delay in the Euro talks probably also contributed to gold going up I guess.

[Gumby]

Gumby, I've been impressed by how closely the gold etfs do track the gold price hour by hour. The structure of them has worked well so far hasn't it? Do inflows and outflows of gold from etfs really not move the gold market?

GLD has virtually no affect on the gold market — though, there is a lot of misinformation from the mainstream media about this. Kid Dynamite has an excellent post about how GLD works, here:

http://kiddynamitesworld.com/why-is-gld ... n-part-iii

If GLD is developing an intra-day premium, don't bullion dealers take that as a portent of GLD being about to buy a load more gold? Also is the intraday wiggling of stock indexes and gold price driven by the futures traders?

That's not how it works. Kid Dynamite discusses that in another post, here, where he says:

GLD is indeed a direct bet on bullion prices – they own gold bullion, not futures or options. You can read all about the details of the GLD Trust here.

However, when an investor goes out and buys GLD, there is no resulting effect causing the trust to "buy physical gold to match investment levels." That's simply not how it works. When you buy shares of GE, the money doesn't go to GE – it goes to whomever sold the shares to you. When you buy shares of SPY, the money doesn't go to the SPY trust in order to buy a basket of S&P 500 stocks. Similarly, when you buy GLD, the money doesn't go to the GLD trust – it goes to the seller of the GLD on the exchange. The trust has nothing to do with it.

Now, you are able to create shares of GLD (in 100,000 share increments) if you go out and buy the corresponding amount of gold bullion. You can take your bullion, deliver it to the trust, and get shares – but the trust doesn't have to go out and buy any bullion. Similarly, if you have 100k shares of GLD, you can give them back to the trust (aka, "Redeem") and they will give you gold bullion in return.

The reason the shares outstanding of the GLD are increasing is because someone is creating GLD shares. Even though GLD frequently trades very close to its net asset value, (you can get the data here) I'd guess that someone has been shorting GLD when it trades rich (above NAV), and buying bullion. This arbitrageur then takes his bullion and delivers it to the trust, and received GLD shares to cover his short.

There has been a lot of talk lately about the USO Oil ETF, and its impact on the oil market. The USO is structured differently from the GLD in that it owns oil FUTURES, which must be rolled each month. The assets of the USO are a huge percentage of the outstanding open interest in oil futures, and thus it ends up costing the trust a great deal each month when they roll their futures position, because everyone in the market knows they are coming and rips their eyes out. GLD, on the other hand, doesn't have to roll anything – they just hold their gold bullion in their vault.

This is neither a recommendation to buy or sell GLD – just an attempt to correct a common misunderstanding out there in the market.

Thus concludes today's lesson.

Source: http://kiddynamitesworld.com/the-wall-s ... l-is-wrong

In other words, GLD has a NAV — based on its vault holdings — and people are constantly arbitraging the value of the holdings. Some ETFs can affect the market, but those ETFs are structured differently than gold ETFs like GLD.

[moda0306]

Gumby,

Despite any market noise within ETFs that doesn't represent true accumulation of new gold, gold ETFs to me almost have to be part of the reason the price of gold has risen.

A lot of people now have access to something via ETF that they wouldn't have felt comfortable with buying physically (my dad being one... no interest in holding physical gold no matter what I try to tell him).

Even if it's via futures and contracts, since actual exchange of these goods backs it up at some point, the increased contract activity would create an implied demand for the commodity itself. 

Maybe this makes gold's price move more accurately and efficiently since ownership can be securitized like stocks & bonds (in fact I'd argue that it does), and that has helped the pricing, but I don't see how one can look at these funds either holding golding or trading futures that at some point have to bite is not part of the increase in price.

[stone]

Gumby "In other words, GLD has a NAV — based on its holdings — and people are constantly arbitraging the value of the holdings."

It is that constant arbitraging that causes GLD to move the gold market. Arbitreurs exchange GLD for gold and that expands or contracts the size of GLDs gold holdings so as to align the NAV and the share price. It is set up so that it never forms a significant discount or premium. You can't expand or contract your gold holdings by tens of tonnes without moving the gold price.

Treasury etfs are a different matter. GLD has allocated gold as its holdings. The bond ETFs lend out their holdings willy nilly. I think the ishares UK treasury gilt etf says that at any given time 50% of its holdings are lent out to short sellers.

[moda0306]

stone,

I had no idea about that.  Doesn't that create huge risks with something like TLT if the short-sellers can't pay the bonds back?

[Gumby]

Despite any market noise within ETFs that doesn't represent true accumulation of new gold, gold ETFs to me almost have to be part of the reason the price of gold has risen.

Yes, but only because an ETF, such as GLD is hoarding 1,233 Tonnes of Gold — preventing that supply from being traded on the open market.

A lot of people now have access to something via ETF that they wouldn't have felt comfortable with buying physically (my dad being one... no interest in holding physical gold no matter what I try to tell him).

Yes, but Kid Dynamite's point is that GLD doesn't accumulate (or dump) gold very often. It only happens when an authorized dealer chooses to transact on some of the ETF's bullion holdings. Most of the time, GLD's vault holdings don't change, so it can't really affect the Gold market.

Even if it's via futures and contracts, since actual exchange of these goods backs it up at some point, the increased contract activity would create an implied demand for the commodity itself.

GLD itself doesn't take part in futures. GLD is just a vault of Gold that sits there, constantly changing value as the price of Gold changes.

Maybe this makes gold's price move more accurately and efficiently since ownership can be securitized like stocks & bonds (in fact I'd argue that it does), and that has helped the pricing, but I don't see how one can look at these funds either holding golding or trading futures that at some point have to bite is not part of the increase in price.

Again, GLD specifically doesn't affect the price of Gold. It matches the price of Gold — and it does it very well.

[Gumby]

It is that constant arbitraging that causes GLD to move the gold market. Arbitreurs exchange GLD for gold and that expands or contracts the size of GLDs gold holdings so as to align the NAV and the share price. It is set up so that it never forms a significant discount or premium. You can't expand or contract your gold holdings by tens of tonnes without moving the gold price.

I'm not sure what you mean. GLD doesn't change its holdings very often. It doesn't need to. You don't need to exchange GLD for bullion to arbitrage an ETF like GLD. The only time GLD changes its holdings is when an authorized dealers feels like they can make a lot of money by doing so.

Treasury etfs are a different matter. GLD has allocated gold as its holdings. The bond ETFs lend out their holdings willy nilly. I think the ishares UK treasury gilt etf says that at any given time 50% of its holdings are lent out to short sellers.

Again, other ETFs do things differently. GLD's holdings don't change that often.

[moda0306]

Despite any market noise within ETFs that doesn't represent true accumulation of new gold, gold ETFs to me almost have to be part of the reason the price of gold has risen.

Yes, but only because an ETF, such as GLD is hoarding 1,233 Tonnes of Gold — preventing that supply from being traded on the open market.

Exactly.  Maybe we're arguing past each other here, but assuming that those 1,233 tons of gold wouldn't be in peoples' homes because they don't feel comfortable going to Skeeter's Pawn Shop buying real gold, then their act of demanding it in ETF form induces GLD to take it off the market instead, and therefore increase the price.

Instead of in 500 tons of gold in peoples' safes there's $1,233 held by GLD.

That is demand being fostered via GLD, so if we can agree that ETF's are enticing people to buy more gold than they otherwise would, then through that we can assume that they're helping increase the price of gold.

Just because they don't buy an ounce of gold the minute I buy $1,700 of GLD on TDAmeritrade doesn't mean that in the long run I'm not helping increase the price of gold by buying something that the exchange has to sell that GLD sold to them, and that GLD isn't going to look at to decide whether or not to buy more gold to increase its ETF inventory because the public is demanding an "easy" way of owning gold.

[stone]

Christina, double check what the situation is with TLT. I'm UK based so I only looked at the UK treasury ETFs and ran a mile when I saw that. Actually it has turned out to be much easier than I envisioned to buy UK 50year bonds directly. Just as easy as buying an etf.
My fear was just as you mentioned- that in a future crisis the bond-ETF value could deviate massively from the bond value because short sellers would not be able to return the bonds to the etf.

[Gumby]

Yes, Moda. You are correct. KD's point is that it GLD trading doesn't instantaneously affect the spot price of gold. Obviously its hoarding of 1,200 tonnes of Gold does affect the spot price.

Also. I erroneously said that GLD doesn't change its gold holdings that much. Actually, the holdings tend to change slightly each day. But, the overall point is that each trade of GLD does not instantaneously affect the spot price of gold. Only the authorized dealers can influence the price of Gold, and they do so whenever they think there's an opportunity to do so.

[moda0306]

Ok.

I think we were just talking past each other then.  I was saying that in the long run, over the last several years, I believe (instinctually) that without gold ETF's gold's price would be lower than it is today.  Maybe not more than $100, but less nonetheless.

But obviously Ferri's point about recent stock correlation was moreso what you were getting at.

I find it a bit convenient that after his prediction of gold's price collapsing didn't come true, he comes in and basically says, "well it's not even really gold anymore because it's in ETF form... it's basically just another stock," completely absolving himself from miscalling the price drop.

Now if stocks collapse and gold skyrockets, then he'll have to come up with something new.

[Gumby]

Ok.

I think we were just talking past each other then.  I was saying that in the long run over the last several years, I believe (instinctually) that without gold ETF's gold's price would be lower than it is today.

But obviously Ferri's point about recent stock correlation was moreso what you were getting at.

Exactly.

[stone]

http://www.zerohedge.com/article/new-re ... prediction

"Just overnight, GLD added another 5.2 tonnes of gold, bringing its new total to a fresh all time high of 1,313.13 tonnes, a whopping 76 tonnes higher than a month ago. As the indexed chart below demonstrates, what we thought could become a positive feedback loop whereby non-physical ETFs scramble to at least catch up to a par NAV, is already in process: the ETF accumulation by GLD, which is now the 6th largest gold-owning entity in the world, has become a self-fulfilling prophecy. If the ETF is indeed purchasing said gold in the open market, there is no way this would not be moving the price much higher, absent massive synthetic shorting by the LBMA. Yet at some point, internal risk controls at even a firm with infinite margin like JPMorgan will take over, and force the bank to cover its record short exposure. When that happens, the already disclosed demand by entities such as ETFs and Central Banks, will catch up with the most manipulated and distorted supply curve in the history of economics."

The intra-day trading of GLD must surely be kept under close scrutiny by the bullion market. They wouldn't let an order for that kind of tonnage catch them unawares.

[moda0306]

stone,

Could you elaborate on your point about bond funds loaning their holdings out?  Does TLT do this (to your knowledge)?  Do you see this as a big risk?

I dont' remember hearing this on Craig's bond FAQ, and it scares the crap out of me.  Maybe individual bonds are the way to go.

[stone]

moda I can't find the fact sheet that I found before but magneto also saw it see: http://gyroscopicinvesting.com/forum/in ... ic=1136.15
There is something about TLT in:
http://www.greatponzi.com/articles/20081119-TLT.html

more general stuff about the process:
http://uk.ishares.com/en/pc/about/securities-lending

http://www.ft.com/cms/s/0/3354514e-effc ... ab49a.html
Providers are permitted to lend out all of an ETF’s constituent assets.
In practice, effective lending rates tend to be much lower but Morningstar data show there are instances where virtually all of a physical ETF’s assets have been lent out for at least 12 months (on a near constant basis). The iShares FTSE 250 ETF lent out an average of 92 per cent of its assets over the year to June.

[Gumby]

http://www.zerohedge.com/article/new-re ... prediction

"Just overnight, GLD added another 5.2 tonnes of gold, bringing its new total to a fresh all time high of 1,313.13 tonnes, a whopping 76 tonnes higher than a month ago. As the indexed chart below demonstrates, what we thought could become a positive feedback loop whereby non-physical ETFs scramble to at least catch up to a par NAV, is already in process: the ETF accumulation by GLD, which is now the 6th largest gold-owning entity in the world, has become a self-fulfilling prophecy. If the ETF is indeed purchasing said gold in the open market, there is no way this would not be moving the price much higher, absent massive synthetic shorting by the LBMA. Yet at some point, internal risk controls at even a firm with infinite margin like JPMorgan will take over, and force the bank to cover its record short exposure. When that happens, the already disclosed demand by entities such as ETFs and Central Banks, will catch up with the most manipulated and distorted supply curve in the history of economics."

The intra-day trading of GLD must surely be kept under close scrutiny by the bullion market. They wouldn't let an order for that kind of tonnage catch them unawares.

Kid Dynamite disagrees with how ZH reads the GLD data...

http://kiddynamitesworld.com/no-gld-is- ... on-part-ii

I don't claim to know who is correct!

[stone]

Gumby, I think they both include slip ups. GLD only increases or decreases its holdings (or more pedantically gets its holdings increased or decreased by the authorized participent arb thingymabub people) when demand for GLD is out of step with demand for gold in general. If people equally bid up the price of GLD and American Eagles and competing etfs and wedding rings; then GLD will not need to adjust its holdings. If everyone chooses to buy GLD rather than competing forms of gold, then GLD will have to increase its gold holdings so as to avoid trading at a premium and vice versa.