 Going Long
Finding Elusive Gold in This Market
by the editors of BIG
GOLD
Casey Research
Jan 27, 2009
At this writing, [Jan 22, 2009] gold is still 15% off its peak, at
least in U.S. dollars. Yet at the same time, the metal is cruising
at or near all-time highs against a host of other currencies,
including the Swiss franc, British pound, Canadian dollar, Australian
dollar, and Indian rupee.
That currency disparity means
buyers around the world are prepared to pay much more for gold,
relative to their own currencies, than is reflected in the New
York spot market, which prices gold in dollars.
Demand for gold coins in particular
is running so high that there were severe shortages in 2008.
Dealers' shelves emptied, mints either rationed their output
or stopped producing entirely, and premiums over the spot price
rose dramatically. All of which implies that the metal's bull
market is far from over. Yet taking advantage of the trend becomes
problematic if you can't get what you want.
Sure, you can buy as much paper
gold as you like, through the SPDR Gold Trust ETF (NYSE.GLD),
which is bullion-backed and will be sensitive to an advancing
price. But what if you simply want physical metal and want it
in quantity - say, a hundred ounces?
Well, you could buy 100 coins.
If you could find them. Or you could buy a single 100-ounce bar.
Take heed: if you are buying
in 100-ounce, 400-ounce or 1-kilo sizes, you want a good delivery
bar, one that carries a hallmark from a recognized refiner.
And buy only from a source you have a good reason to trust. The
gold trade has been replete with con artists since ancient metalworkers
began hammering on the shiny stuff and found they could increase
their profit margins by adding in a little silver, copper, or
even lead. With 100 ounces going for upwards of US$85,000, caution
is in order.
Once you're ready to commit
to a 100-ounce buy, the next logical question is: Is there any
way to avoid the big premiums and acquire what you want at spot?
The answer, fortunately, is yes. You can elect to play
with the big boys and get your 100-ounce bar on the COMEX, where
the bullion banks and giant funds do their trading.
Playin' the COMEX
The COMEX is primarily a paper
market, with speculators going long or short on contracts for
future delivery. 99.9% of those contracts get settled in cash
and are closed out before the delivery date arrives, with participants
pocketing profits or taking their lumps. Very little physical
gold changes hands through COMEX trading.
But some does, because every
participant who goes long has the right to pay in full and insist
on actual delivery. And every participant who goes short has
the right to deliver the goods and get paid. Those trades represent
the other 0.1% of the contracts.
The Casey COMEX User's Manual
First, get a little more acquainted
with the topic. Log on to the COMEX gold section at:-
http://www.nymex.com/gol_pre_agree.aspx
...and have a look around.
Pay close attention to the
Current Session Overview:-
http://www.nymex.com/gol_fut_cso.aspx
...The current session
overview gives you a real-time picture of trading, with the various
delivery months displayed, along with the price per ounce being
bid. (With gold, the months further out nearly always have higher
prices, a situation known in the commodities trade as contango.
The opposite, when near-term prices exceed those down the road,
is called backwardation, and for gold it's extremely rare.)
If you decide to proceed with
the idea of buying on the COMEX, you have to open an account
with a futures broker. To do that, you'll need to answer some
questions about your financial status and then make a deposit.
We spoke with an agent at Lind-Waldock in Chicago, one
of the oldest and most active futures brokers, to learn about
their requirements.
First, at Lind-Waldock, you
must have a yearly income and net worth of at least $25,000 and
$50,000, respectively; anyone who can afford a hundred ounces
of gold will surely qualify. Then you must deposit a minimum
of $5,000 with the broker. Finally, you choose from among several
levels of service, which affects the amount of commission you'll
pay.
Once the futures account is
in place, you're set to go.
Let's say the bid price three
months out is $850/oz., and you like gold at that price. You
call your broker and place an order at $850, for one gold contract
(which represents a single 100-oz. bar of good delivery metal).
As with bidding on a stock, you may not get what you want if
the market is heading up and runs away from your price. The alternative
is to place a market order, trusting that it gets filled at close
to your target price, but that can be risky in a fast-moving
market.
Let's assume you get your contract
and lock up what you'll pay for the gold, most of which will
be due at expiration. What next? There are two possibilities.
You can just deposit the full cost of the gold, sit back, and
enjoy the wait for your prize. Or you can deposit the minimum
amount required (the minimum "margin"), which varies
and is set at the exchange's discretion. For a single gold contract
at the moment, it's $5,800, or about 7% of the contract's value.
That's how the speculators
play the market, putting up as little front money as possible.
For you, that won't be a problem if the price of gold rises,
since the broker will be crediting a matching amount of cash
to your account on a daily basis. But you have to be careful
if the price of gold falls, because the broker will then charge
your account for a matching amount of money day by day - and
to keep the balance from going below the minimum margin requirement,
he'll send you a margin call, insisting that you deposit
more cash. If you fail to do so, the broker will enter a sale
order for you, and you'll be out of the market.
Changes in the value of a futures
contract, with their attendant shifting cash requirements, are
of critical importance to traders who are simply playing with
paper. Since you're only interested in acquiring a physical gold
bar, the fluctuations shouldn't affect you. Just make sure you
have enough money in your account that you're not inadvertently
sold out.
Then, on the settlement date,
your account will be charged for an amount equal to the settlement
price multiplied by the exact weight of the particular bar that's
been assigned to you (a "100-oz." COMEX good delivery
bar can actually vary in weight between 95 and 105 ounces). This
is when everything gets squared up.
Taking Delivery
If you keep your position open
until delivery, the COMEX will hand your broker a warehouse receipt
with the details of your specific bar (hallmark, serial number,
and weight to one-thousandth of an ounce). The broker can either
hold the receipt in your account or mail it to you. (If you take
possession of a warehouse receipt, be aware that it's an irreplaceable
bearer instrument. Don't lose it!)
Your bar will be sitting in
the vault of one of the four designated COMEX depositories, all
of which are in or near New York City. If you want to bring the
bar home, you'll have to pick it up at the depository or arrange
for third-party delivery. If you intend to hold it until gold
reaches a certain price and then sell, your best bet is probably
to leave the bar in the COMEX depository and leave the receipt
with your broker.
We called Scotia Mocatta, which
operates one of the COMEX-designated vaults, and were quoted
a storage fee of $15/month per bar. If, however, you want the
bar in your hands, you'll have to pay a $150 delivery fee to
get the bar released by the depository. Then you're responsible
for retrieving it, which could be a problem.
Unless you want to put the
bar in your suitcase and fly home with it, you'll have to have
it delivered. You can't ship a gold bar via the U.S. mail, FedEx
or UPS; you have to hire an armored car service, such as Brinks.
Shipping costs depend, of course,
on how far your gold will travel from the City. VIA MAT International
(USA) gave us a ballpark figure of $150 to transport one gold
bar from New York to California - a heckuva lot cheaper than
airfare, and you get to keep your shoes on.
One final note: armored carriers
won't deliver to a house address. You would have to arrange to
receive the shipment at a business, which could be an additional
worry if neither you nor a trusted friend owns one. Or you could
have it delivered to your bank and slide it into a safe deposit
box, provided you don't mind the bank's employees knowing what
you're doing.
Will You Need an Assay?
If you leave your gold bar
in the COMEX depository, it will be easier to sell. You just
go through the above procedure in reverse, going short a contract
instead of buying one.
However, if you take physical
delivery and later wish to sell through the COMEX (or through
a private dealer), you will need to have the bar reassayed. A
prospective buyer of such a costly item must be certain that
it was genuine to begin with and hasn't been tampered with while
in your possession.
The COMEX provides a list of
approved assayers on its website. The one we contacted, Ledoux
and Co., quoted us $300 per bar for the service.
And that's all you need to
know to get gold wholesale.
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Jan 22, 2009
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