Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

New COMEX Rule, Another Reason to Fear Gold, Silver and Commodity ETFs

Commodities / Gold and Silver 2010 Feb 17, 2010 - 05:44 AM GMT

By: Dr_Jeff_Lewis

Commodities

Regardless of their expensive annual fees, frequent tracking errors, and the simple fact that you'll never be able to actually touch the gold or silver your ETF claims to hold, there are several more reasons ETFs should never be used by precious metals investors.  An important rule change by COMEX, the American commodity exchange, allows ETF substitutes for precious metal delivery.


Paper as Metal

To address a temporary problem of liquidity, COMEX has systematically created an even bigger problem for investors.  The exchange allows investors to make good on their futures positions with gold and silver ETFs rather than the real assets, thus opening up the door for hugely distorted market prices. 

How it Works

Under the clause 104.36 in the COMEX rulebook, exchanges can take place on the exchange as long as the products meet certain criteria.  After sorting through legalese, investors find that the criteria isn't as demanding as one would expect from a multi-trillion dollar exchange, but is actually quite loose.  COMEX requires that exchanges be made in economically equal products.  For instance, a 1000 ounce silver futures position can be used in the delivery of 1000 ounces of silver, despite their inherent differences. 

This creates immense problems for investors, as well as the exchange itself.  First, no silver actually trades hands, but only a silver derivative that has supposed claims to silver.  Second, the exchange-traded fund is economically similar in that it has equal worth to the same amount of silver; however, investors cannot receive physical delivery from the ETF issuer.  In essence, purely derivative investments are equal to physical metals in the eyes of COMEX, even though the reality is quite different.

Further Complications

Reading from the prospectus of the two biggest gold and silver exchange-traded funds reveals that through the COMEX marketplace, paper can really be turned into gold!  The popular SLV ETF discloses in its prospectus that there are times when the exchange-traded fund will hold cash, or cash equivalents, allowing itself the opportunity to issue more shares than the silver it actually holds in the trust. 

In addition, the exchange-traded fund has the ability to make claims against third parties (a derivative) to track the price of silver on the marketplace.  This opens the door for large manipulation in the silver markets, as investment dollars in the ETF can be placed on derivative bets.  Then the shares can be exchanged through COMEX to meet delivery on futures positions. 

The result is that derivative products owned by SLV can easily find their way into what is supposed to be a purely physical market, allowing for the opportunity of an oversupply of silver compared to what is actually in existence in vaults.

What it Means for Investors

ETF investors are clearly at a disadvantage, although the chance of manipulation is only a bullish signal for physical investors.  COMEX rules have allowed artificial inflation of the amount of silver futures available prices, and it is sure that physical metals will only gain in value as this comes to light.  There is simply no better investment than physical metals both for the short and long term.

By Dr. Jeff Lewis

Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-Review.com

Copyright © 2010 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in