Gold ETN GOE up 421% in 1 Month – What Gives?

by Darwin on February 22, 2009

There’s no doubt that Gold’s been hot, to the tune of 16% up in the past month.  However, even the most ambitious leveraged ETF can deliver a 2X return on gold prices via (UGL).  In order to obtain a 421% return on GOE during this timeframe on an ETF/ETN, you’d be talking a leverage factor of 26 Times!  So, what gives?

Clearly, the ETN was meant to simply track the price of gold.  According to the website of the issuer, The performance of MLCX Gold ELEMENTS ETNs is linked to the MLCX Gold Index – Total Return (MLCX Gold Index).  In order to track a traded instrument, I compared GOE to GLD for the prior period before the anomalies occurred.  They clearly track together (below).

 goe-old1

However, during the past several weeks, shares of the ETN GOE have zoomed to ridiculous proportions.  Check out how GOE diverges massively from GLD.  There is no rational explanation for this.

 

goe-1-month-stock-chart

In trolling message boards and other sources I could find, there doesn’t seem to be anybody that really knows what’s going on.  The product brochure states, “As exchange-traded futures contracts have stated expirations, in order to maintain an exposure to a futures contract on gold, the Index Component is rolled into the next available contract month in advance of the month in which expiration of the current contract occurs. The rolling process takes place over 15-day period during each month prior to the relevant expiration month for the contract.”  Well, this clearly doesn’t explain a 400+% move in a month.  I’m familiar with contango, as we’re seeing in oil now, but with a contango to this degree, you’d have investors scooping up gold like there was no tomorrow.  Prices are rising, but not at a frenzied pace; we’re not even at prior highs yet given the completely decrepit market and deterioration of financial systems around the world!

The only somewhat logical explanation I’ve seen is some conjecture that there were investors that shorted the shares and since there is no proper market maker and they had to cover at insane prices.  A less scientific opinion cited the ELEMENTS ETN administrators as “being retards”.  Whatever the true cause is for this unexplained divergence, of course, it begs the question, is there a way for investors like us to exploit this phenomena?

To Update:  Credit Suisse has decided to delist the ETN (article here).  Good Riddance!  I was starting to feel guilty that I didn’t go along for the ride!

 

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{ 4 comments… read them below or add one }

1 JOHN March 9, 2009 at 5:43 pm

It’s obvious that this stock indeed will track the price of gold…. on a one to one basis. This ETN is headed above nine hundred dollars and will pare the price of the underlying commodity. So hang on and enjoy the ride!

[Reply]

2 Sam Bow March 10, 2009 at 6:35 pm

This guy posted yesterday and all of a sudden they are delisting. Could be a coincidence.

http://www.elitetrader.com/vb/showthread.php?s=&threadid=156612

[Reply]

3 Darwin March 10, 2009 at 8:28 pm

Yeah, I appreciate that someone linked to my article early on, sent me tons of traffic (haha). But, who knows, before long, you would have thought CNBC would have started shouting about this. There are probably tons of small investors who lost money on the huge $20+ spreads just trying to ride the wave. Then today, it tumbled. I’ve never seen anything like it and would be surprised if I did again.

[Reply]

4 Igor Quackenbbush March 14, 2009 at 12:28 am

I figured it out.

This is a special secret test to show lawmakers what every stock would look like without specialists and market makers.

[Reply]

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