New Gold ETF To Be Listed On Shanghai Exchange

On the heels of the new Hong Kong Commodity Exchange listing a new gold contract, the Shanghai Stock Exchange has announced the upcoming listing of a new gold ETF. As yet unnamed, it's been written into the People's Republic of China's twelfth five-year plan.

However... questions remain over the regulatory supervision of the product.

"Currently, supervision of gold trading falls on the central bank, while the China Securities Regulatory Commission is responsible for monitoring ETFs. This causes a problem over who is responsible. However, we are looking for a win-win solution so
we can launch such a product," Wang [Zhe] said.

Wang Zhouyi, an analyst from Shanghai Cifco Futures, told the Global Times Sunday that there is a growing demand for gold investment and related products in China.

"A gold ETF product will provide a new method of hedging for investors," he said.

It'll be interesting to see how popular this vehicle becomes. Like Indians, mainland Chinese consumers tend to prefer either physical or gold savings accounts provided by banks.

Hong Kong Mercantile Exchange Starts Trading Gold, In U.S. Dollars

Although there was some talk about the Hong Kong Mercantile Exchange (HKMEx) trading gold futures in renminbi, the trading got up and running with contracts denominated in greenbacks. Unlike other commodities exchanges, the HKMEx is going to be open for fifteen hours each weekday: 8 AM to 11 PM Hong Kong time, midnight to 3 PM Greenwich Mean Time, or 8 PM to 11 AM Eastern Daylight-Savings Time. The contracts are 32 troy ounces in size.

As of 5:30 p.m. local time, HKMEx gold for August delivery traded at US$1,492.7 a troy ounce. A total of 3,415 contracts were traded, valued at US$163.33 million, the exchange said in a statement....

"With our launch today, we are well on our way to becoming the world's gateway for commodities trading with China," said Albert Helmig, president of the exchange.

Looks like a good start. The exchange's decision to trade in greenbacks confirms the U.S. dollar price as the primary price of gold. Where they came up with 32-ounce contracts, I don't know.

Big Bet On GLD Volatility

As reported in the Wall Street Journal, an unknown trader has placed a huge bet of SPDR Gold Shares Trust (GLD) options. The bet is on the underlying stock becoming more volatile.

The bet on more volatility in the SPDR Gold Trust runs counter to what the market has seen of late. It has been placid on that front as gold kept steadily advancing to fresh records, including another one Thursday. But if more central banks turn off the easy-money spigot, or if more decide to prolong their policies into next year and beyond, gold and assets linked to it are likely to see more volatility, traders said.

"When banks are easing, that's bullish for gold. When they start tightening, that's bearish," said Etai Friedman, head of equity derivatives trading at MKM Partners, noting that the market hasn't been pricing in large swings yet....

The trade itself is for 15,000 call options on GLD hedged with a 780,000-share short sale. Although the quantities don't balance, quantitative analysis has the trade pegged as "delta-neutral" which means that the fluctuation risk on each side of the trade balances out.


15,000 calls equates to control of 1.5 million shares on the long side. It's true that this trader will be protected should gold fall, but a naive look at the numbers shows a big benefit if gold keeps ramping up.


While I'm on the subject of trading, a new pairs trade has gotten the attention of Barron's Focus on Funds blog. It seems that punters are taking the carry trade one step further by buying gold and shorting the yen. This newfound variant of ther carry trade in partly responsible for short positions in the yen risning 37% last week.

Here’s how it works: A purchase of the SPDR Gold ETF (GLD) is followed by an equally large dollar-yen swap to wipe out exposure to the greenback. That gives an investor a yen-denominated gold investment.

As related by economist Dennis Gartman to Dow Jones Newswires, such a trade can yield a bigger profit than a traditional dollar-based gold investment....

A similar trade was done in gold and Euros. What it amounts to is buying gold in terms of the currency being shorted.

Mystery Of Huge Drop In Open Interest Explained

Surprisingly, for such a large drop, it's a small player that was responsible. Daniel Shak had a $10 million hedge fund, and he put the proceeds into a gold spread trade that went bad as prices fell.

Thanks to the nature of futures trading, Daniel Shak's $10 million hedge fund held gold contracts valued at more than $850 million, more than 10% of the main U.S. futures market, and the equivalent of South Africa's annual gold production.

But as gold prices started falling this year, the trade, which was a combination of being long and short gold contracts—bets that prices will both rise and fall—started going bad. Monday, he liquidated his position, and is returning money to clients.

As a result, the number of gold contracts on CME Group Inc.'s Comex division plunged more than 81,000, to about 500,000, the biggest single reduction ever. While his trade didn't account for all of the contracts, an average daily move is about 3,000 to 5,000 contracts.

That Mr. Shak and his firm, SHK Asset Management, could control one of the largest positions in the gold market underscores how leverage can enable investors to control huge positions in many commodity markets.

He ended the trade because his fund was down 70% on it, so he salvaged what he could by liquidating. The reason given by him was the commodity exchange bumping up margin requirements by 25%.

Mr. Shak is a champion poker player as well as a spread trader. He claims that his spread trades usually make money, but in this adventure he had to fold a big hand.


Amazing what paper gold can do. Paper cancels out paper...