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The efficient way to get gold exposure in your portfolio

March 16, 2009


You can’t turn on the television these days without seeing commercials asking you to send your gold jewelry in for cash, or buy gold or silver coins as a great investment.  The one ad I think should be illegal shows the price of silver climbing steadily higher without any dips right up to the end of the chart. The thing is, the chart isn’t up to date. It conveniently ends in mid-2008, right before Silver lost about 50% of its value. Another popular ad says if Gold goes to $5,000 an ounce, the spattering of Gold coins on the table in front of him will be worth several hundred thousand dollars. 

Meanwhile,  nearly every analyst you see on television are recommending adding some precious metals exposure to stock portfolios either through mining company stocks or metal tracking Exchange Traded Funds (ETFs).  The main reason they are doing this is it is the only thing on their limited investment menu (no managed futures products) which was up in 2008, so what else would they be talking about.

With all of these people pushing for you to invest in precious metals, and gold in particular – the contrarian investor in me says the yellow metal is probably due for a steep decline soon. It is also odd that Gold has only risen back to roughly its early 2008 highs, despite the global economic recession and financial crisis getting worse and worse. If ever there were a time for Gold to be rocketing up to $5,000 an ounce, wouldn’t this be the time - when entire nation’s are going bankrupt (Iceland), the world’s largest banks are down 95%+, and the US is over $11 Trillion in debt.  If ever there was a time to question paper money and the fiat banking system, this would be it – but precious metals are not reacting in such a way.

We are (luckily) not in the business of projecting where the price of Gold is going, but for better or worse many of the people we talk to are convinced it is going higher. This belief that it is going up begs the question – what is the best way to get Gold exposure in your portfolio?

Overpaying for Gold exposure

We’ll start the answer to that question with the worst ways, in our opinion, to get exposure to Gold; with worst meaning the least efficient and most expensive.  These include buying so called precious metal (Gold and Silver) coins, jewelry, and even bars of Gold from metals dealers.

Consider the Gold Coin commercial on television today. These commercials slyly tell you that Gold is a great crisis period investment (which has some truth to it), and then proceed to try and charge you $1,200 to $1,500 per ounce of Gold when the price is down at $925 or so. These are 99% pure Gold or Silver coins which they are asking you to pay 10% to 20% over the price of gold or silver for.

Further, many of coin investments labeled and sold as precious metals exposure are anything but. There are many investments in coins which have really nothing to do with the gold or silver content, and have more to do with the rarity of the coin. At this point, it is rare coin investing, not gold investing.  You might as well be betting on rare stamps or ancient maps.

We have also heard of so called investors purchasing used jewelry and selling it through the much hyped cash for gold companies which send you an undisclosed amount of money for any gold you send them. Talk about trust. They don’t even tell you how much you’ll get for your gold, but we’ll bet it is well below spot gold rates (in the neighborhood of 50% to 75% of what the gold is actually worth).

How about so called Precious Metal stocks?  Can’t you invest in the stocks of companies who mine Gold and Silver to get exposure? This has to be a great way to get Gold exposure, right? Wrong. Consider the Philadelphia Stock Exchange’s Gold and Silver Sector Index which tracks the stock prices of such companies. This index is up just 24% in total over the past 8 years, while the price of Gold has gone up 113%. (Past Performance is Not Necessarily Indicative of Future Results)

That sure doesn’t seem like the right choice for Gold exposure, and when you consider that you are investing not just in the price of Gold when investing in the mining stocks, but also in the management of said company, their financing, taxes, property rights, equipment costs, and so on. It is more than possible for a company to lose money while the price of Gold goes up, or more likely – not make as much money as the price appreciation of the commodity itself or lose more money than the price depreciation.

Finally there is the Gold ETF (NYSE: GLD), which is the best non futures option in our opinion for investors.  The Gold ETF basically invests in Gold futures contracts and purchases outright Gold Bullion in order to track the price of Gold as closely as possible. The problem is, the nice folks who run the ETF also want to get paid, and there is a cost to purchasing, storing, and so on.  Because of these costs, the GOLD ETF can be considered a depreciating asset – meaning that if the price of Gold remained the same, the ETF would eventually go to $0 as expenses ate into the value of the trust.

So the Gold ETF is probably the closest you can come in the non-futures world, but you are still paying an expense charge to get that exposure (0.40% per year for the GLD ETF), and you aren’t really owning any gold, you’re just owning something  which owns something which  is backed by some Gold. (usually not a big distinction, but in today’s world of credit party risk and derivative scares, who knows).

Efficient Gold Exposure

Being in the futures business, we can’t help but think of two much cheaper ways to get the Gold exposure you may be after. Both revolve around using Gold futures contracts.  

The first of these is to simply buy a gold futures contract instead of all the other stuff. This will track the spot price of Gold nearly exactly, with the only thing you need to worry about being the rolls from month to month. But that can be combated by buying the furthest out contract you can find, and then only rolling every 5 years or so. This would in effect be like running your own Gold ETF – with that portion of your portfolio owning the futures contract tracking the price of Gold, while you would never actually own any Gold. 

One issue with this may be the relatively large contract value of Gold futures, which are worth 100 ounces of Gold. That means you would be controlling roughly $92,500 worth of Gold at current prices ($925 per ounce * 100 ounces). So for someone who is only interested in getting $10,000 worth of exposure or so, the futures route may not fit. However, there are two things to consider in that regard.

One, while one futures contract controls $92,500 worth of Gold, the investor only has to put up a fraction of that in their account. The standard margin for holding one Gold contract is about $5,000, of course you also need enough in your account to withstand any price fluctuations. Every $1 move in the price of Gold will cause a gain or loss of $100 in your account. We recommend having at least $20,000 in your account to hold a Gold futures contract.  Two, for those looking for a little less than 100 ounces of Gold exposure is the miNY Gold contract, which is ½ of the Gold Futures contract, or 50 ounces of Gold Exposure. A single miNY Gold contract could realistically be held in an account for about $10,000.

The second, somewhat more advanced way to get Gold Exposure via the futures markets is to use a futures contract not just to speculate on prices, but to actually facilitate the purchase of actual gold. A futures contract gives the buyer a right to the specified amount of commodity (in this case 100 ounces of Gold) at the agreed upon purchase price. It is a contract to buy that much gold at that price at a point in the future. If buying the current April Gold futures for around $925 per ounce, the buyer of that contract is agreeing to lay out $92,500 on March 27th (the expiration date) in exchange for 100 ounces of Gold.

So, the more advanced method of getting your Gold exposure is to purchase a Gold futures contract with the goal of letting it expire and getting “delivered on”.  If you want to own actual gold, using futures to purchase 100 ounces of gold could be the best deal you will find. You purchase the gold futures contract for a small commission (call it $25), and once it expires you are the proud holder of 100 oz of gold per contract at the closest to spot prices you will find. No need to pay those high premiums of the gold dealers or get into rare coin collecting to get your gold exposure.

But what happens once you get delivered on? Will a truck with 100 ounces of Gold show up at your front door? That can happen. You can arrange for delivery of the actual gold and put it in a safe, under your mattress, or in a safety deposit box. 

But the more normal course of action is to allow the clearing firm to book those 100 ounces of Gold in your name at a warehouse, getting you something called a warehouse receipt. From there, you can keep it at the warehouse, paying up to about $50 per month for storage (which works out to about 0.60% per year, or slightly above the ETF costs).  

But here’s the cool part, and something which is unique to a futures account. While you are getting gold exposure through owning actual gold sitting in a warehouse, that same gold can be used to margin other futures positions. It is in effect the same as having a Treasury bill in your account.  Although one major difference being that the Gold position can lose money (it will lose money when and if gold prices go down), whereas the Treasury Bill is risk free, meaning if you hold it to maturity you are guaranteed to get the initial deposit plus interest back.

With T-Bill rates so low these days, some investors are looking into alternative ways to earn returns on their excess cash.  If you are also a “Gold Bug” convinced the yellow metal is going higher, holding a gold warehouse receipt in your futures account could be the answer. Of course, the T-bill will pay interest (however small) no matter what, while the price of Gold will have to go up in order to earn any return on the gold warehouse receipt. The gold warehouse receipt will be marked to market every day, making or losing $100 per $1 move in the price of Gold. But for those who want the gold exposure anyway, this is a method in which investors can 1. Get the best possible price for the Gold, and 2. Have the ability to earn trading returns and returns from Gold prices increasing on the same money.

As with investing with T-Bills, most asset classes simply can’t offer this benefit futures accounts do. You can’t buy a house for $500,000 and earn interest on that $500K at the same time - for example; nor can you purchase $100,000 worth of stock, and at the same time earn interest on that $100K.

Finally, this methodology isn’t the exclusive reign of gold; similar plans could be enacted to get Natural Gas or Crude Oil exposure, corn or soybeans, and other commodities instead of investing in sector funds, companies, or ETFs.

Delivery Process for Gold or Silver:

Delivery- Clearing Firm holds the receipt in account for customer

1) Client buys the futures contract, paying $25 commission
2) Client will take delivery between First Notice Day and the Last Trading Day
3) On delivery day account is debited cost plus a $50.00 delivery fee
4) Receipt is booked to customers account
5) Monthly storage charge passed on to customers account(About $50.00)

-Tony Montini


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Feature | Week In Review: Bear market rally or the real thing?


Indications from some top U.S. and foreign banks about profitability during the past week sparked a relief rally and along with it a bit of confidence which has been lacking through the painful performance of most market sectors. The rally also took on fuel from the announcement of a big merger in the Health Care sector which to the market was an indicator that if such a big deal could be consummated it could be a sign the credit markets might be starting to function in a more conducive manner. Persistent economic and recessionary worries seemed to take a back seat in most sectors as some commodity sectors came to life thanks not only to the rally in the indexes from the banking news, but from indications their own supply/demand prospects could be better in the future. The new found investor confidence and sentiment that some of the bigger banks may not need additional government aid sent stock indices to their best performance since early November. For the week Russell futures ended +11.31% higher, Mid Cap futures ended +10.86%, S&P 500 futures +10.21%, NASDAQ futures finished +8.64% and the Dow futures rallied +8.42%.

The positive vibes felt in the stock sector filtered into the commodity and food arena with gains seen across the board. Some of the Grain and Oilseeds found additional support from private forecasts of the upcoming planting intentions report that indicated the corn crop could be cut further than earlier anticipated mainly due to the ratio between corn and soybean prices not to mention higher planting input prices for corn due to higher fertilizer costs. For the week Corn the corn rally added +7.47% to prices followed by the Soybeans +1.08%. Wheat ended -1.77% lower on prospects for moisture in the dry Southern U.S. Plains over the weekend. Gains in the Livestock were sparked by ideas of lighter upcoming supplies with Live Cattle ending +2.67% and Lean Hogs+1.12%. The soft sector also ended higher with Cocoa +4.80 leading the way followed by Cotton +3.38%, Coffee +2.75%, OJ +1.98% and Sugar +0.78%.     

The energy complex was a mixed affair during the past week as word of possible production cuts by OPEC helped lead Crude Oil +1.60% to a moderate rally followed by RBOB gasoline +1.55% which found support from the seasonal stock of gasoline for the spring and summer driving season. Heating Oil lost -2.72% and Natural Gas down -0.43% was hampered by larger inventories prompted by lower winter usage.

The metals sector which had been the safe haven sector during the thrashing of the stock market posted slight profit taking declines as investors moved some money out of this sector with the new found confidence in the Stock Indices. Despite the losses support on breaks should be seen from the stimulus in the U.S. as the package includes a hefty amount of capital for infrastructure investment in the U.S. For the week Palladium fell -1.96%, Copper -1.55%, Gold -1.44%, Platinum -1.40% and Silver ended slightly lower -0.90%.              

The currency and interest rate sectors although very volatile ended the week in a mixed state as the sectors continue to try and sift through the mixed messages that have been received as of late. The main market moving news emanated from ideas the G-20 would announce a better possibility of improving conditions in the banking sector after a couple of large U.S. banks indicated a return to profitability. The largest move on the news came from the Euro+2.20% with the Japanese Yen posting slight gains. The Swiss Franc -2.26%, Dollar Index -1.69% and British Pound -0.68% lost ground on ideas that investors would key on higher yielding Euro zone investments.      

Managed Futures

Discretionary multi market traders continue to outpace systematic trend followers thus far in March.   The Lone Wolf Investments LLC Diversified program continues to lead the field and is up approximately 2.40% this month.  DMH Futures at an estimated +0.35% is another discretionary manager who has posted positive numbers this month and it is nice to see him trading again. Dighton USA is back in the game as well after what seemed like a two month layoff.  Unfortunately, the program is back in the red and is currently down approximately -2.29% at week’s end.   Mesirow Financial Commodities Absolute Return has also struggled a little bit this month losing approximately -1.06%.

Systematic multi-market managers have found the trading waters to be choppier in March with most managers posting negative numbers.   Notable programs in the red include the APA Strategic Diversification Program -0.27% est. & APA Modified Program at -2.67% est.; Clarke Global Basic -1.06% est. & Clarke Global Magnum at -1.97%;   Hoffman Asset Management is down approximately -2.38% and Robinson-Langley is down an estimated -2.01%.

In stock index trading the Paskewitz Asset Management Contrarian 3X Stock Index Program bounced back nicely last week although it is still in the red for the month at approximately -1.85%.  Meanwhile, MSLO is near breakeven at an estimated -0.12%.

For Option Trading mangers volatility is back and very much in play so far in March. For those focusing on the financial markets only last week’s dive down to 12 year market lows raised the alert level causing for several managers to reposition their short dated option positions and resulted in pullbacks from their recent run-up.  Financial only mangers estimated results are as follows for March: Ace Investment Strategists -4.28%, Cervino Diversified Options -0.37%, Cervino Diversified Options 2x -0.75%, Crescent Bay PSI -2.66%, Crescent Bay BVP -9.70%, Raithel Investments -1.46%, and Zenith Index Options 0% with no trades.

Elsewhere, the commodity based Option Trading mangers have continued to position themselves well and are capitalizing on the current environment.  FCI is currently ahead an estimated 2% for March.

Agriculture and Grain traders NDX and Rosetta have continued to remain cautious with very little activity.  Current March estimates are as follows: NDX Abednego +0.40%, NDX Shadrach +0.24%, and Rosetta -1%.


Equity markets came roaring back last week and several trading systems were quick to jump onboard the rally in the corresponding stock index futures. Both day and swing trading programs had the most success on Tuesday and Thursday with limited activity on the other days of the week.

Beginning with the day trading systems, the Bounce programs came back to life after struggling for the past several months. Bounce eRL and eMD were better by +$2,801.43 and +$2,773.33 respectively after getting in line with the rally on Tuesday and Thursday.  Waugh eRL traded every day with the exception of Friday for a net result of +$884.76 for the week. Compass SP wasn’t too far behind +$705.45 for the week. Finally, BetaCon 4/1 ESX traded three times for +$530€, two of those trades on Thursday.

Similar to their day trading brethren, Bounce swing systems were in a class of their own last week. Bounce eRL was up +$2,964 while Bounce eMD was up +$1,606.67 on a closed-trade basis but held its position heading into the weekend. Strategic ES was next in line +$965 for the week while AG Mechwarrior ES was +$185. Finally, rounding out the other programs was Ultramini ES which was down -$132.50.

Futures based investments are often complex and can carry the risk of substantial losses. They are intended for sophisticated investors and are not suitable for everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading losses are material points which can adversely affect investor returns.

Past performance is not necessarily indicative of future results. The performance data for the various Commodity Trading Advisor ("CTA") and Managed Forex programs listed above are compiled from various sources, including Barclay Hedge, Attain Capital Management, LLC's ("Attain") own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

The dollar based performance data for the various trading systems listed above represent the actual profits and losses achieved on a single contract basis in client accounts, and are inclusive of a $50 per round turn commission ($30 per e-mini contracts). Except where noted, the gains/losses are for closed out trades. The actual percentage gains/losses experienced by investors will vary depending on many factors, including, but not limited to: starting account balances, market behavior, the duration and extent of investor's participation (whether or not all signals are taken) in the specified system and money management techniques. Because of this, actual percentage gains/losses experienced by investors may be materially different than the percentage gains/losses as presented on this website.

Please read carefully the CFTC required disclaimer regarding hypothetical results below.