tag:blogger.com,1999:blog-14963913.post3142135778060350341..comments2023-10-27T20:27:57.900-04:00Comments on Kid Dynamite's World: No, GLD Is Not Overdue to Buy 200 Tons of Gold: An ETF Lesson Part IIKid Dynamitehttp://www.blogger.com/profile/17475987512856310577noreply@blogger.comBlogger33125tag:blogger.com,1999:blog-14963913.post-40541068934354311682010-11-12T22:30:25.243-05:002010-11-12T22:30:25.243-05:00great post. i am a loyal follower of zerohedge. i ...great post. i am a loyal follower of zerohedge. i commit one of my three work monitors exclusively to the blog; it helps suppress the nocuous banter of cnbc blaring over the hoot. with that said, i'm glad to see a well stated refutation to ZH's post that confuses the mechanics of etfs. i am a trader on a bulge-bracket etf arb desk (not an admission i make with any sense of repletion); but i believe that etfs are widely misunderstood and it is refreshing to see a blog that tackles the subject with proficiency. i'm glad that zh's regress turned me on to this blog, which i have never viewed before. it is worth reminding readers, though, that "tyler" is not a single poster; there are at least 40 people allowed to post under his identity --- a good garden may have some weeds.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-14963913.post-19090616018513425532010-11-12T09:50:07.724-05:002010-11-12T09:50:07.724-05:00Hi KD,
Off-topic, but since you enjoy thinking ab...Hi KD,<br /><br />Off-topic, but since you enjoy thinking about the entitlement attitude throughout today's society, I thought you'd enjoy this story. A high end grocery store in Boston ($8/dozen eggs!) closed and a co-owner blamed its customers for being too cheap (in quite a bratty way). Check out the first link...it's the letter (from Google Cache). If you don't want to click on the links, then Google "don otto's boston herald." <br /><br />http://www.universalhub.com/2010/shuttered-south-end-market-customers-its-all-your#comment-150089<br /><br />http://www.bostonherald.com/business/general/view.bg?articleid=1295744Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-14963913.post-30009711372124791562010-11-11T11:47:08.745-05:002010-11-11T11:47:08.745-05:00Tom -
if you bought GLD and held it for long enou...Tom -<br /><br />if you bought GLD and held it for long enough, and the price of gold didn't move a penny, then yes - the price would eventually get to zero. There is no "bump up feature" - think about it like this: originally 1 GLD = 1/10th of an ounce. Currently, 1 GLD = slightly less than that - so creations and redemptions are for slightly less than 1/10th oz per share.<br /><br />by the way, though, if you buy gold bullion and pay to either 1)have it insured or 2) maintain a safe deposit box, the same thing is true - eventually you'll spend more on "carrying costs" than you did on the gold itself.<br /><br />we can quantify this - really quickly, sloppy back of the envelope math: in 6 years, GLD's "representation" has lost less than 2.5% of 1/10th of an oz. That translates into .00042 oz/year, or about 58c per year per ounce at current prices. You can check my math - I did it sloppy and quick.Kid Dynamitehttps://www.blogger.com/profile/17475987512856310577noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-81110759369126153022010-11-11T11:36:31.904-05:002010-11-11T11:36:31.904-05:00Great explanation, thanks KD. I have a question t...Great explanation, thanks KD. I have a question though. If the GLD sponsor "must sell a little gold to pay its bills," which it takes from its gold holdings thus making the percentage of the original .10 oz of gold per GLD share continually decline, doesn't that mean GLD essentially has something like a radioactive half-life? Won't the NAV per share eventually approach zero? Or is there some corrective feature that periodically bumps the NAV back up to 100% of the .10 oz.?<br /><br />TomTom Huttonhttps://www.blogger.com/profile/13122852220455509148noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-89418583368689632772010-11-10T22:47:01.514-05:002010-11-10T22:47:01.514-05:00yes anon - I think you answered your own question....yes anon - I think you answered your own question. That was pretty much the topic of ETf Lesson Part I:<br /><br />http://fridayinvegas.blogspot.com/2010/09/etf-lesson-part-i.html<br /><br />You can't redeem loaned shares. so the shares would get recalled, maybe you get a squeeze, and it self corrects. If anything, it results in higher prices though - not lower prices.Kid Dynamitehttps://www.blogger.com/profile/17475987512856310577noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-22226261621640648442010-11-10T21:41:57.248-05:002010-11-10T21:41:57.248-05:00Great post. Would like to see you address the iss...Great post. Would like to see you address the issue that ETFs can be shorted, and therefore the longs exceed the underlying physical. In a hyperinflationary environment, where the shorts on this product could go completely insolvent in a flash, how would that work out for those thinking GLD offered protection from collapsing fiat? Could not participating dealers buys shares and redeem them for gold until all there remained was an empty vault and a bunch of offsetting paper claims on the GLD price (for whatever that was worth to the remaining longs, given the empty vault!). I know, I know, in that world the price of GLD would be bid far above the NAV (especially by the shorts covering -- but aren't they insolvent?), causing other participating dealers to supply physical to the trust in exchange for GLD shares --- not sure I'd bet on it though! By the way, over 40% of my total net worth is in GLD, but the more these central bankers print the less comfortable I am with that.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-14963913.post-88777134175573481142010-11-10T18:53:35.053-05:002010-11-10T18:53:35.053-05:00scharfy: "other ETF's like USO, aren'...scharfy: "other ETF's like USO, aren't quite as simple, and have more active management, no? This would increase tracking errors? I am picturing Oil futures traders at the Nymex making a living off of retail oil ETF's rolling contracts."<br /><br />bingo. that's precisely what happens.Kid Dynamitehttps://www.blogger.com/profile/17475987512856310577noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-44604236966931073182010-11-10T17:04:43.532-05:002010-11-10T17:04:43.532-05:00Definitely an ETF newbie I am...
It struck me an ...Definitely an ETF newbie I am...<br /><br />It struck me an good engineering to allow the AP's to arb away and create/redeem, as opposed to managed care. Also, no futures, cheap storage, S&P's name on it - all good.<br /><br />Just reread ETF lesson part I and have a new appreciation.<br /><br />Slightly OT - other ETF's like USO, aren't quite as simple, and have more active management, no? This would increase tracking errors? I am picturing Oil futures traders at the Nymex making a living off of retail oil ETF's rolling contracts.<br /><br />Good post and Thanks...<br /><br />oh yea, almost forgot -<br /><br />GOLD BITCHEZ!!!!!!!!!!!!!!!!!!!!!scharfyhttps://www.blogger.com/profile/18309882331114382248noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-41689680616506620492010-11-10T16:48:30.446-05:002010-11-10T16:48:30.446-05:00scharfy - the chart of spot gold vs tonnage tells ...scharfy - the chart of spot gold vs tonnage tells you about demand for the particular product - I think that's about it.<br /><br />as for if this is the best way to own physical? I'm hesitant to even answer that question as I have ZERO interest in debating it with lunatics.<br /><br />Goldbugs will say "if you want to own physical gold, buy physical gold." In my opinion, I agree with you - it's a very well designed product, and it's my choice for gold exposure. I don't care about rubbing gold coins on my nipples, I want something that will give me accurate exposure to the price of gold. In my opinion, GLD does that efficiently, accurately, and robustly. <br /><br /> Goldbugs will also say GLD is not physical - that's true - it's not physical gold - it's a piece of paper ownership in a trust holding physical gold. That doesn't keep me up at night. I think people who paid a 10% premium to NAV to own PHYS are insane (the premium is smaller now, as Sprott has saturated the market with secondaries and started to run out of paranoid people willing to pay a huge premium for his product -but that game was great for him for a while.)<br /><br />If you want to own gold for 50 years, maybe you should buy physical gold (which brings it's own concerns: storage, verifying that it's real, insurance, etc...)<br /><br />whatever helps you sleep better at night.<br /><br />NOTE: non-intelligent replies to Scharfy's comment and my response will be deleted with prejudice - or without prejudice - or just deleted.Kid Dynamitehttps://www.blogger.com/profile/17475987512856310577noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-64919102523777525042010-11-10T16:38:31.918-05:002010-11-10T16:38:31.918-05:00Thanks for the reply KD and WCW.
I suppose thats ...Thanks for the reply KD and WCW.<br /><br />I suppose thats its useless to look at a chart with spot gold versus GLD tonnage. Doesn't tell you anything does it? That correlation will not necessarily be very tight. (Do I have that right?) <br /><br />The share price relative to the NAV/share should be pretty tight though (i.e premium/discount) According to the website most of the fluctuations are (at the close) razor thin. Plus or minus 1/4 of a percent. So the Arbs keep this vehicle in line it would seem.<br /><br />This seems to be a really well designed product.<br />Is it safe to say you agree with that statement? Possibly the best way to own Physical (conspiracies notwithstanding)?scharfyhttps://www.blogger.com/profile/18309882331114382248noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-70993656268103162912010-11-10T16:11:53.350-05:002010-11-10T16:11:53.350-05:00anon - i'm a math guy. my grammar can be wicke...anon - i'm a math guy. my grammar can be wicked bad (Nemo already corrected me once)... but I think I meant "without prejudice" - like "all comments of this sort will be deleted regardless of who they are from" - but I'm probably wrong in the usage.<br /><br />VC - you wrote "GLD cannot grow to $56B NAV without inflow of physicals from authorized participants"<br /><br />absolutely - of course. that's a tautology (actually, it's not really - they could do a series of secondary offerings, but that doesn't happen. Growth in assets comes from inflow of physical from APs). My point was that you cannot send an order to GLD trust to buy $10B gold. it doesn't work like that.<br /><br />then you wrote "the growth of GLD's NAV is far faster than the growth in gold prices. "<br /><br />the entire point of Tyler's chart is the OPPOSITE of this currently. But in any case, they are two very different things, and need not be highly correlated. You can see Tim Iacono's post for more on this.Kid Dynamitehttps://www.blogger.com/profile/17475987512856310577noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-10833841870185484972010-11-10T15:04:16.170-05:002010-11-10T15:04:16.170-05:00KD, your understanding of ETF is correct but logic...KD, your understanding of ETF is correct but logic flawed.<br /><br />GLD cannot grow to $56B NAV without inflow of physicals from authorized participants; the growth of GLD's NAV is far faster than the growth in gold prices.VCnoreply@blogger.comtag:blogger.com,1999:blog-14963913.post-62866378570174210962010-11-10T14:37:04.695-05:002010-11-10T14:37:04.695-05:00Great post - thanks for writing it!
Nitpick: &qu...Great post - thanks for writing it! <br /><br />Nitpick: "Prejudice" with respect to deleting comments would be taking action without thoroughly evaluating the comment. So you presumably meant rants will be "deleted with prejudice" rather than "without".... perhaps, if you're a fan of Apocalypse Now, rants would deleted "with extreme prejudice".Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-14963913.post-20203139234094743492010-11-10T13:01:21.676-05:002010-11-10T13:01:21.676-05:00Scharfy - fyi, one of my boys tells me that they d...Scharfy - fyi, one of my boys tells me that they do this arb for pennies - ie, not dimes.Kid Dynamitehttps://www.blogger.com/profile/17475987512856310577noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-73816168654767767692010-11-10T10:59:16.904-05:002010-11-10T10:59:16.904-05:00Nice write-up. I've been arguing with some com...Nice write-up. I've been arguing with some commenters on one of my Seeking Alpha posts for a day now:<br /><br />http://seekingalpha.com/article/235739-ishares-silver-trust-etf-s-silver-stockpile-not-keeping-pace-with-gains<br /><br />I can't bear to read any of the comments at ZH that prompted you to write this...Timhttps://www.blogger.com/profile/16530974968126497397noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-44427376253013455352010-11-10T08:51:40.923-05:002010-11-10T08:51:40.923-05:00great post---I hope you get a million hits on this...great post---I hope you get a million hits on this...marketmaniahttps://www.blogger.com/profile/09602608621072167246noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-37987520567661788482010-11-10T08:38:25.514-05:002010-11-10T08:38:25.514-05:00The chart posted on ZH was useful and not somethin...The chart posted on ZH was useful and not something I had seen before. <br /><br />There is definitely a positive correlation between spot prices for gold and the creation of GLD units. But these 'spurts' Tyler is talking about sometimes actually lag big moves in the spot price. That is, investor interest in GLD sometimes increases after big up moves and before the price flattens out for a while. <br /><br />It would have been better if he said that the history of GLD spot/tonnage correlation suggests there is possibly about to be heavy demand for GLD shares after such a big up move in spot. Since heavy demand for GLD shares basically translates to net demand for gold through the creation mechanism, one might reason that this will lead to further increases in the spot price. <br /><br />But looking at the chart, this isn't a very reliable analysis. Spot prices are often flat even as GLD tonnage increases, and spot prices often rise even as GLD tonnage flattens out. <br /><br />So, one might be led to the conclusion that the chart shows that creation/redemption of GLD shares doesn't have an obvious effect on spot prices at all. <br /><br />Of course, the gold bugs have been saying this for years, and use it as evidence that GLD isn't doing what it's supposed to be doing. But that's another error, for another time.FischerBlacknoreply@blogger.comtag:blogger.com,1999:blog-14963913.post-69354027300763768632010-11-10T08:26:32.356-05:002010-11-10T08:26:32.356-05:00You should write a post about the Fed is pretendin...You should write a post about the Fed is pretending to buy gold in QE3 using HFT in an effort to fund Obamacare but actually it is a scam to help Goldmans. Watch that traffic boom!!<br /><br />DannyAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-14963913.post-14345135136889720382010-11-10T07:55:56.202-05:002010-11-10T07:55:56.202-05:00VS - ETF Trusts don't receive net purchase inf...VS - ETF Trusts don't receive net purchase inflows - that's the whole point. You can send your mutual fund an order to buy $10B, and the fund manager will have to go out and buy $10B of his portfolio.<br /><br />On the other hand, if you try to buy $10B in SPY, you're buying from other people in the market. If you buy aggressively, and you drive it above fair value, people will short it to you, and buy either futures or the underlying index to hedge themselves. Then, they'll deliver that underlying basket to the SPY trust, receive newly created SPY shares in return, which they use to close their risk positions.<br /><br />It's just like if you buy $10B of IBM - IBM doesn't get your $10B.Kid Dynamitehttps://www.blogger.com/profile/17475987512856310577noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-78022746498006696202010-11-10T03:01:20.029-05:002010-11-10T03:01:20.029-05:00Interestingly, shares in GLD can be seen as pre-19...Interestingly, shares in GLD can be seen as pre-1972 USD. It seems that there is a lot of misunderstanding about ETF's these days.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-14963913.post-13053804913561608132010-11-10T02:16:42.346-05:002010-11-10T02:16:42.346-05:00What happens when GLD or SPY receive a net purchas...What happens when GLD or SPY receive a net purchase/inflow of $10B?VCnoreply@blogger.comtag:blogger.com,1999:blog-14963913.post-87359441036748249202010-11-09T22:23:22.509-05:002010-11-09T22:23:22.509-05:00KD, thank you for taking the time to point out suc...KD, thank you for taking the time to point out such a blatant misrepresentation/error on the part of ZH. Sometimes when I read that site, I feel like Mugatu, "I feel like I'm taking crazy pills". So that you don't feel like you are the only one in a sea of crazed ZH readers, I imagine that the error was clear to many readers. By the time I read the story on ZH, and was prepared to write a rebuttal in the comments, I saw that there were dozens of comments of the "GLD isn't really gold, buy PHYS" variety and decided it was worthless to attempt to educate Durden's fanboys. That site saddens me sometimes.Jon Beyerhttps://www.blogger.com/profile/03734067084958714948noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-61572179479232451852010-11-09T20:50:13.005-05:002010-11-09T20:50:13.005-05:00Nice.
Thanks for writing this KD.
I saw the star...Nice.<br /><br />Thanks for writing this KD.<br /><br />I saw the start of the thread on ZH and shuddered a bit.<br /><br />-PeterPeterAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-14963913.post-82697823480498705582010-11-09T14:44:59.692-05:002010-11-09T14:44:59.692-05:00> How deviated does [premium/discount] have to ...> How deviated does [premium/discount] have to get, in order for the creation/redemption mechanism to begin<br /><br />Creations and redemptions happen at the last possible moment, since there is a relatively large fee to create and redeem. But you do not care, unless you are the ETF sponsor.<br /><br />As a potential shareholder, you only care about the arb process. Anyone can arb against the basket. With a 1-cent spread almost all of the time, the market is arbing GLD more-or-less constantly. IOPVs are only published every fifteen seconds.<br /><br />If you want to play premiums and discounts, look to closed end funds.wcwhttps://www.blogger.com/profile/16307608293310560164noreply@blogger.comtag:blogger.com,1999:blog-14963913.post-48894238253267192882010-11-09T13:38:29.621-05:002010-11-09T13:38:29.621-05:00Great post, man.Great post, man.Yangabangahttps://www.blogger.com/profile/01602946300256374843noreply@blogger.com