Tuesday, September 16, 2008

Gold purists warned about this

AIG-backed ETF Securities products plummet

I was wondering what the hell was going on with some of my crashing ETFs and then found this article. "Among the worst-hit products are ETFS Livestock, which has plunged 81.06% since yesterday's close, while ETFS precious metals and ETFS petroleum have dropped 50.68% and 51.01% respectively."

Posted by mountain goat @ 02:49 PM (1734 views)
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26 thoughts on “Gold purists warned about this

  • Yes commodity private investors have been slaughtered. Trading is now suspended at the LSE. I am not sure if this means AIG cannot honnor these contracts and are now bankrupt.

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  • Well, that has certainly scared me out of ETFs unless I get to read the full contract. I had some shares in agricultural ETFs last year and early this year, and was considering livestock at some stage. Boy am I glad I didn’t now.

    Very sorry to hear about your losses goat.

    Cash under the mattress time every body else…

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  • p.s. I had also considered investing some of my cash set aside for precious metals to go into gold ETFs through my ISA for tax purposes…that won’t be happening either now.

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  • last_days_of_disco says:

    Cash is king. That means one thing, its getting worth more. This tells you… We are experiencing deflation.

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  • japanese uncle says:

    Besides, oil price could well go below 50/barrel, bringing down all prices with it. Hell of a deflation it will be.

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  • Guys.. tins of food & coffee & tobacco. These are going to be the commodities to have for a couple of years.

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  • Don’t quite understand this article. I am aware of a problem with Exchange Traded Commodities (ETCs)
    However I have bought and sold ETFS Metal Securities – Physical Gold [PHGP], today and made a good profit, certainly in light of the turmoil going on elsewhere.

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  • MG – Yes im sorry to hear about this too. I hope you are relatively unscathed. Its tough enough to get the direction right, let alone this. My sympathies. The only thing I would say is to trade using IG. – they do cover ETFs but you can punt the actuals eg spot Gold rather than the Streetracks Gold ETF, you can also diversify because the minimum £s per point are pretty small. [For example a FTSE min bet is £2 per point – on LIFFE it was [and i think still is] £25. Of course you may not want to trade paper at all but i would suggest that if you are successfull take down the profits, now where to put them? As much as i hate to say it, probably good with a NS&I or Gilts [notwithstanding your view on the depreciation of £].

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  • last_days_of_disco says:

    This is what kills banks. Why keep your most precious asset which is gaining in value every day with a bunch of folks
    that keep losing it and charge you for the priviledge in every possible way because they desperately want to get their hands on it?

    The logic is simple and when the Herd catches on, the banks are toast.

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  • paranoia blue @ 3.40pm It is the ETFs associated with AIG that have had the problem. Also there was some mention of the physical metal ETFs not being hit. I presume it all comes down to how the fund is set up…the point is that a given ETF may (read: almost certainly has) have real risks associated with them not just due to the underlying, as it appears Mountain Goat found out today.

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  • @Paranoia Blue – “ETFS’ physically-backed firms Metal Securities and Gold Bullion Securities, and Shell-backed Oil Securities, are unaffected by AIG’s problems, with ETFS reporting active markets in all of them.” There seems to be 2 markets running simultaneously, which is why actual gold is doing fine. It’s the leveraged promise of gold that is akin to the Emporer’s new clothes!

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  • d’oh & layers thanks for that. It clears things up. I still have a very large exposure in PHGP as part of my hedge – along with Au bullion – against a possible finanicial meltdown!
    ATB

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  • I have some ETFS leveraged gold – can’t get any information anywhere! Prices all down, FT.com down for quotes, my broker is down

    🙁

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  • If the oil price goes down, production will do down which will support the price. $90 is when fields will close as its the break even point.

    AIG is probably going bust, we will know in the next 24hours. Insurance cost for AIG debt is 58% up front plus 5% per year – not good odds.

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  • Thanks for the sympathy guys. Here’s hoping Bernanke and Paulson pull off another bailout 🙂

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  • Ok so hold on – ETFS are not bust and the contract for these ETCs is with them. What facility are AIG playing here in supplying the credit? Is the contract actually with AIG in the end and so irredeemable?

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  • My sympathies to MountG and beartil2010.

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  • On a related note…I still have some shares in an ISA…unlike a CREST share account, you do not own the shares in a shares ISA account – they are part of a pool. Be careful if you have more than the amount insured by the FSA in a share ISA account, as the other creditors will probably get to pick over the assets in it before you do…

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  • ETFS silver (PHAG) is backed by physical silver (well it’s supposed to be!)

    “PHAG is backed by physical allocated metal held by the
    Custodian (HSBC Bank USA N.A.). All physical silver
    metal held with HSBC conform to the London Bullion
    Market Association’s (LBMA) rules for Good Delivery.”

    Think about it for a while. The price of gold and silver should be rocketing at the moment with all that is going on. What better way to force the price down than to try to scare people out of the ETFs?

    Given that ETFs trade on whatever the going rate is for the commodity I can’t see why an insurer should be needed in the final event.

    Which ETFs are affected? PHAG and PHAU seemed OK 20 minutes ago.

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  • @ Beartil2010 yes ETF Securities TRACK the AIG Index. So hopefully our money is no where near AIG. What a mess.

    @ Cornishman look at ETFS Commodity Securities Ld ETFS Leveraged Gold (LBUL) for example. This gives 200% the returns on DJ-AIG Gold Sub-Index. The performance of this has been completely disconnected from the gold price all day, down 40% at one point.

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  • I have spoken to someone at Selftrade and PHAU should be unaffacted and has been trading OK. But AIGL (Livestock) is affected and hasn’t traded all day. Having said that I have AIGL and it is too late to trade but the valuation has held up but that is probably because they can’t trade it.

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  • Cornish – “The price of gold and silver should be rocketing at the moment “. None too sure of that Mr C. [realise the logic but in these days perhaps liquidations of comodities that have no yield may be high on the list to convert to cash?].

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  • @ techieman agreed it is all about cash crisis right now, in some ways it is amazing that gold is holding up. If the Lehman incident triggers a CDS storm people will have to sell whatever is to hand.

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  • @ MG – according to the ETFS website AIG is listed as the ‘credit’ for the commodity non-physical funds. They are honouring all redemptions at the moment and I am hopeful this will continue even if they go bust?

    The market-makers have stopped processing the ETCs, I take it because they are worried about AIG not paying them their fees for processing transactions – a legitimate business cost. But the ETC still represents a contract to supply the item?

    It’s really not clear.

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  • How about this from the factsheet:

    ‘The ETFS Securities are not guaranteed by AIG, AIG-FP or anyone else: ETFS Commodities Securities are direct, limited recourse obligations of the Issuer alone and not obligations of AIG, AIG-FP or any other member of the AIG Group.’

    ETFS are the issuer. AIG produce the gold index. AIG take the contracts and deal with the authorised participants, the market makers, I think. Hence AIG are a middleman used by ETFS. Also, ETFS say they are looking at allowing ‘holders (us) to lodge redemption notices directly with the issuer (them).’ Currently this is not allowed under market rules.

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  • ETF securities have got back to me. PHAU as expected is unaffacted. AIGL is not trading because they have bought a AIG futures contract. I was told if AIG go down then there are 2 scenarios. The first is that policy holders money is ringfenced and therefore you would get it back. Otherwise you’re one of the creditors in which case I get the impression you ‘aint got much chance. They couldn’t say which one would apply, so I guess it’s the second one. If AIG is bailed out then ETF should have the option to extricate themselves.

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