Tag Archives: commodities
Posted on 02. Apr, 2012 by Insider Monkey.
Guest Post By: Guan Wang
Gold stocks are quite popular among hedge funds these days, and with good reason. John Paulson, who is very bullish about gold, made $5 billion by betting on gold in 2010. As of December 31, 2011, the largest position in the 13F portfolio of his Paulson & Co was the gold exchange-traded fund (ETF) SPDR Gold Trust (GLD), in which Paulson had over $2.6 billion invested. Besides Paulson, there were 55 other money managers bullish about SPDR Gold Trust. In total, they had $8.2 billion invested in the position.
Another gold ETF, Market Vectors Gold Miners ETF (GDX), was also popular with hedge funds last year. It was held by 41 hedge funds at the end of last year. In addition to ETFs, hedge funds were also bullish about companies engaged in producing gold, such as Barrick Gold Corporation (ABX) and Newmont Mining Corp (NEM). There were over 40 hedge funds with these two positions in their 13F portfolios at the end of 2011. For instance, David Einhorn’s Greenlight Capital had $60+ million invested in Barrick while Jim Simons’ Renaissance Technologies had nearly $90 million invested in Newmont. Other gold stocks with significant hedge fund interest are Goldcorp (GG), Kinross Gold (KGC), Allied Nevada Gold (ANV), and AngloGold Ashanti (AU).
But, is gold truly worth investing in? Or, is it overpriced relative to other commodities? Let’s check it out by comparing the historical prices of the gold and commodity indexes.
We are going to use spot gold prices and two commodity indexes: S&P GSCI (Goldman Sachs Commodity Index) and CCI (Thomson Reuters Equal Weight Continuous Commodity Index). S&P GSCI is a broad-based index mainly weighted in energy (80%), agriculture (10%), industrial metals (6%), and precious metals (2%). CCI is comprised of 17 commodity futures that are continuously rebalanced to maintain equal weighting. Unlike GSCI, which can overweight the energy sector, CCI provides relatively even exposure to all commodity subgroups (energy 18%, metals 24%, soft commodities 29%, and agriculture 29%).
Gold vs. GSCI
We collected daily data points of spot gold prices and GSCI from January 8, 1991 to March 23, 2012 and plotted the values we obtained (see the graph of gold price vs. GSCI). Gold price and GSCI tracked each other closely before late 2008. After that, the price of gold went up rapidly while GSCI grew at a relatively slow pace. As a result, the gold-price-to-GSCI ratio has gone up to a higher level in recent years. As of March 23, 2012, the gold-price-to-GSCI ratio is 2.37, 25% lower than its peak of 3.18 on February 23, 2009 but still 35% higher than its historical average of 1.75.
Gold vs. CCI
Gold looks a bit overpriced compared with other commodities when using GSCI, an index has higher weight on energy. Now, let’s compare the gold price with an equally weighted commodity index, CCI. Similarly, we collected daily data points of gold prices and CCI from December 29, 1978 to March 23, 2012.Gold prices grew abnormally high in January 1980 to about $850 per ounce due to high inflation, high oil prices, and the termination of the direct convertibility of the dollar to gold. The price of gold has also gone up much faster than CCI since late 2008. Therefore, the gold-price-to-CCI ratio has a peak of 3.02 on December 7, 2011 and it also reached 2.93 earlier on January 21, 1980. As of March 23, 2012, the ratio is 2.89 which is 74% higher than its historical average of 1.66 (see the gold/CCI graph).
Overall, the price of gold has been on an uphill trend over the past decade, but it grew much more rapidly than other commodities only in recent years. Gold market is very liquid and it also doesn’t cost a lot to store it. Gold supply is also pretty inelastic which makes it a good long-term play on inflation. These may be the reasons why investors preferred gold over other commodities. Our calculations showed that gold is overpriced relative to other commodities. This doesn’t mean that gold prices are going to go down though. Considering that there were no supply side shocks after September 2008 that would explain the 100% increase in gold prices relative to commodities we think investors would be better off by betting on commodities and shorting gold.
Posted on 23. Jan, 2012 by Wilensky.
As promised, the European Union followed through with their promise to ban all oil imports from Iran today in an effort to halt the country’s nuclear development program. The halt on oil was accompanied by a number of other provisions including sanctions on trading with their central bank. Just days after the US, French, and British militaries sent a flotilla of warships through the gulf, the combined effect of the ban and military actions are sure to add pressure to our already tense relationship with Iran who reiterated their threat of a closure of the Strait of Hormuz. Markets responded with a more than 1% jump in the price of Brent futures, surpassing the $111 a barrel handle. Although the situation is seemingly bullish for oil, investors should remain cautious of the high exposure to headline risk.
See more here: EU bans Iranian oil, Tehran responds with threats | Reuters.
Posted on 19. May, 2011 by Pension Pulse.
I’ve sat with some of the best hedge fund managers in the world. The best of the best know the theory but more importantly, they can give you tons of examples of actual trades that went for and against them. That’s exactly how this manager presented his views. He has the academic and industry credentials, but it’s his actual commodity trading experience in Canada and the US that came through as he walked me through one trading example after another.
I love talented alpha managers. I’ll repeat what I’ve been stating the last few posts, there is exceptional alpha talent in Quebec that is being underutilized or worse still, totally ignored. I met two of Montreal’s best hedge fund managers today and I wouldn’t bat an eyelash to invest in either one of them (the other is an equity market neutral manager).
The question I get from outside-Quebec investors is if they’re so good how come the Caisse and other large Quebec institutions don’t invest in these new and existing hedge funds? There are a lot of reasons. First, reputation risk. There have been quite a few scandals in Quebec with institutions getting burned with funds like Lancer, Norshield, Norbourg, and other frauds. The last thing any institution here needs is to read that some hedge fund they invested with blew up, especially if it’s a local fund (the media in Quebec are merciless).
Second, unlike other places, Quebec lacks the entrepreneurial drive to develop the absolute return industry here in Montreal. There (more…)
Posted on 13. May, 2011 by David Merkel.
When currencies do not serve as a long-term store of value, economic actors search for ways to preserve future purchasing power, which often mean purchasing commodities. But most commodities are not cheaply storable over long periods, so actors get forced into the few that do: gold, silver, etc. There is a problem here, stemming from dumb money. When dumb money shows up for purchase of generic “commodities” distortions follow: backwardation, large storage demand, and warped market incentives.
Eventually overproduction catches up, but the volatility when it breaks can be huge and self-reinforcing, with c0unterparties raising margin to protect themselves. Extreme volatility causes exchanges to raise margin requirements substantially, which reveals which side of the trade is inadequately financed, which typically is the side that was winning, which leads to a reversal in price action. The dumb money is revealed.
Now after a washout, the dumb money often assumes that powerful entrenched interests colluded against them to deny them their long-deserved free ride to prosperity through speculation. The exchanges are in cahoots with the other side. Well, no, the exchanges have two interests, which are solvency and transaction volume, which drives their profits. Solvency is a more primary goal for an exchange, because the second goal can’t exist without it, and exchanges are not thickly capitalized.
Many different types of financial systems are subject to these risks. Think of AIG: they were rendered insolvent by rising margin requirements as their creditworthiness was downgraded, largely because the rating agencies concluded they were going to lose a lot of money off of their many bets on subprime residential credit. Think of all of the mortgage REITs that got killed as repo haircuts rose on all manner of mortgage-backed securities at the time that values for the securities were depressed. Alternatively, think of Buffett, who entered into derivative trades where he received money and bore the risk, but his agreements limited the margin that he would have to post.
Posted on 29. Apr, 2011 by Ron Rowland.
Barclays rolled out 19 new commodity-based exchange-traded notes (ETNs) last Thursday (4/21/11). The 18 new Pure Beta products attempt to track the same commodities as 18 existing iPath ETNs, the primary difference being the process used by each underlying index to roll future contracts. The iPath Seasonal Natural Gas ETN (DCNG) was also introduced, although it is not part of the new Pure Beta methodology.
Barclays new Pure Beta indexes intend to provide a more representative measure of commodity market returns by reducing the negative impacts of contango. Instead of rolling futures contracts on a monthly basis, they may roll into one of a number of futures contracts with varying expiration dates.
Each index will attempt to provide the best proxy for the average price return of the front-year futures contracts for each commodity in the index, while avoiding parts of the futures curve that are subject to persistent market distortions. A new Barclays’ special report, The Basics of iPath Pure Beta Commodity ETNs (pdf), provides additional information and background on the methodology.
Posted on 23. Mar, 2011 by David Spinowitz.
The US Dollar has been the king of currencies for some time now. According to Soros, there was a flight from all currencies, which is why the price of commodities, especially gold and oil, were generally rising. He also stated that an orderly decline of the dollar was desirable and that the entire system needed to be reconstituted towards a global currency. When commodities, notably oil, is bought and sold in the futures markets it is done in U.S. Dollar denominations. This is why we see such a strong negative correlation between the price of crude oil and the value of the US Dollar.
Based on the predictions of Soros, China will be the new engine of the global economy and the Yuan will replace the US Dollar as the new world reserve currency. The International Monetary Fund has the right idea with their SDR (Special Drawing Right) basket of currencies, which includes only the currencies of industrialized nations; British Pounds, Euros, Japanese Yen, and US Dollars.
According to the Financial Times, Overlay Asset Management has brought to life an attractive alternative to the IMF’s basket, the Wealth Preservation Currency Index. This index consists of the currencies of the world’s 15 largest economies, weighted by their gross domestic product, adjusted for purchasing power parity. The PPP element ensures a higher weighting to emerging market currencies than is commonplace in other currency baskets, with the Chinese renminbi (accessed through non-deliverable forward contracts) accounting for 16 per cent, Indian rupee 6 per cent and Brazilian real 4 per cent.
This “currency war” continues to heat up, with no palpable resolution in sight. While it would be a tedious process to replace the US dollar as the world’s reserve currency, it appears unavoidable, especially while Big Ben’s quantitative easing and loose US monetary policy continues unabated.