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Paper beats rock...for now, anyway: ThomWatch

Thom Calandra Thom Calandra, www.thomcalandra.com
0 Comments| December 4, 2008

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More sheafs of “paper gold” might prove the old game true: paper beats rock … but only in the short run for fast cash.

The brand new short-selling gold and leveraged gold ETFs use derivates such as futures and options, swap contracts and forward sales to position their funds for or again the gold (and silver) price. The tickers include (NYSE: UGL, Stock Forum) and (NYSE: GLL, Stock Forum) in New York.

In a world where everyone wants a hedge these days, the ProShares Ultra commodity funds that trade as stocks in the U.S. almost surely will change hands in the millions of shares. (There are other commodity funds that leverage and go short, including ones for oil.)

As I like to tell my small audience, there are so many exchange-traded funds, some 850 or so at last count, you can short-sell the long and crooked nose on the Wicked Witch of the West were she to pass you on the street. I still am waiting for a Long Beryllium Fund, though.)

Expenses are relatively high for the ProShares gold and silver ETFs – about 0.95% -- given the use of options, futures and other paper derivatives.

One has to hope the structural integrity and operations of the mechanisms at these funds works as well as that old paper beats rock game.

Still, one must ask the question: WHAT ARE THESE MONSTERS THINKING?

The ProShares prospectus, for example, states: “Each of the Funds attempts to have total exposure to the corresponding benchmark that equals 200% of Fund assets for the Ultra Funds, and minus-200% of Fund assets for the UltraShort Funds, at the time net asset value is calculated. To achieve this, each Fund is expected to hold some combination of Financial Instruments (swap contracts, futures contracts, forward contracts, option contracts) and that in combination with cash equivalents result in total long notional exposure equal to 200% of Fund assets for the Ultra Funds, and total short notional exposure equal to minus-200% of Fund assets for the UltraShort Funds.”

Nine-year-old ProShare Capital Management LLC of Maryland U.S. is the sponsor. Here is the prospectus.

I have a nine-year-old here at home. She plays paper beats rock with her 12-year-old brother. He is the counterparty in the game.

Click to enlarge

The “counters” in ultra short and long commodity funds are banks, insurers, futures exchanges, quants and so on. Fast-cash artists, in other words. Sound familiar, Black Swan believers? (Photo by ChrisKitze.com.)

“You have a lot of counterparty risk,” Nathan Lewis told me Thursday morning. Nathan wrote GOLD: THE ONCE AND FUTURE MONEY. He manages money in Connecticut.

Paper gold looks like a terrific hedge – for those who do not want the extreme risk of shorting COMEX and other gold futures. Terrific, for example, if early talk becomes reality that the International Monetary Fund and other governmental and quasi-agencies see fit to sell thousands of tones of gold in the next three to six months to help boost both the U.S. dollar and the world’s currency exchange systems.

Yet the terrific nature of these monstrous ETFs might become terrible if financial institutions suffer and fall by the wayside in coming months and years.

James Turk, an economist and operator of transactions service GoldMoney.com, tells me from Europe, “I hadn't seen these before, but there are similar ones in London. They are of course paper gold. They give you exposure to the gold price, and that's all. When you buy the long fund, you do not own gold. You own an equity giving you exposure to the gold price. It's like gold futures in the sense that it is just another way to speculate on the gold price, but it is done with shares rather than a futures contract.”

Turk points to the temporary suspension of London-based commodity funds earlier this autumn because of their attachment to insurer AIG. The funds, more than 100 of them, later were reinstated at the London Stock Exchange. AIG, which is still playing paper beats rock, was stricken and near death at the time. London regulators received assurances the assets backing a family of exchange-traded commodity exchange funds, or ETCs as they are called in London, would be isolated.

“The weakness of these schemes is clear from what happened to the London funds,” Turk says Thursday. “The exposure to the gold price was guaranteed by AIG, and so the funds closed to prevent a rush of redemptions when AIG collapsed.” Please see: ETF Securities.

That is it for now. The second issue of Ticker Trax By Thom Calandrais out. It is a humdinger.

We have in the new service what might become the planet’s best short-sale candidate, plus more from the best and the brightest across the planet, starting up north there in gold country, where some miners really do have hearts of gold.

On The Ticker Trax

Ticker Trax By Thom Calandraexplores planet Earth for those few stakes that offer the prospect of excellent, in some cases cosmic, returns. It is for those who are entirely at ease with stratospheric levels of risk. (Please click here for charter sign-up.) Ticker Trax is for those who make select, high-octane investments and honor those stakes with on-spot research, patience and due diligence. It is available, I am told by the fine folks at Stockhouse, for 10 more days at the charter price.

Please see inaugural sample issue of Ticker Trax. Also, please see the press releaseabout the launch of the new service.



HOLDINGS: Thom’s cosmos of holdings is listed for free Stockhouse members on www.Stockhouse.com under the “portfolio setting” for user TCALANDRA. He and his family also own recently minted gold coins. For more ThomWatch, please click here.

THOM’S STORY:Thom Calandra helped his audience find value in a quagmire of investment choices. He also settled a valid complaint with the U.S. Securities & Exchange Commission in 2005. Thom co-founded CBS MarketWatch, MarketWatch.com and FT MarketWatch in Europe. As the voice of Thom Calandra's StockWatch and The Calandra Report, Thom fancied $300-ounce gold before that metal became an investment rage. Thom visited bioscience companies, metals mines and scores of thin-crust pie joints across the planet in a search for profit, fashion and pizze de trippa gorgonzola. Thom's novel PABLO BY NUMBERS was completed in summer 2008.


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