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On the Wings of Gold: GF's GAMBLING & COMMODITIES Thread

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Here is an excellent article on gas ETFs that also explains the contango problem. However, in this context, it looks to me as if we could move into backwardation again sometime soon, see green line in the chart below: if it moves above 0 again, we're in backwardation. This would be beneficial for these kind of trackers. So, I keep my gas ETF bet for now.

 

http://www.barchart.com/etf/default.php?ref=natgas

As with crude oil and other commodity ETPs, investors need to be very aware of the major impact that an upward sloping futures curve (which is called “contango”) can have on a natural gas ETP. An upward sloping futures curve means that the futures contracts that expire farther out into the future are trading at a higher price than the futures contracts that expire sooner. There has been an outcry about the very poor performance of natural gas ETPs in the past two years when the natural gas market has been in a steep contango. A Bloomberg article goes so far as to refer to the U.S. Natural Gas Fund (UNG) as a “widow maker” because it has performed so poorly relative to natural gas prices over the past two years. The underperformance is not due to a so-called “rigged market” as some disappointed investors believe, but rather to the predictable outcome of a product whose performance is hurt badly when the futures market is in a steep contango. Contango is simply a function of the market expecting higher natural gas futures prices in the future and is not caused by a “rigged” market.

...

Fig2_100510.gif

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I guess this sums it up perfectly. It is taken from an article linked to from the one I mentioned above.

 

Remember - commodity ETPs are a double bet

 

The important thing to remember is that an investment in a commodity ETP is a double bet. One bet is on the performance of the commodity spot price and the other bet is on the shape of the futures curve. The behavior of commodity ETPs is more complicated than it appears. Investors therefore need make sure that if they are going to participate in the commodity ETP market, they need to choose an ETP that dovetails with their outlook for both spot prices and the slope of the futures curve.

FROM:

Commodity Exchange-Traded Product (ETP) Performance and the Importance of the Futures Curve and Contango

http://www.barchart.com/etf/default.php?ref=etpperf

 

Also:

The negative effects of contango attract the attention of bloggers and the financial press who write negative articles attacking the underperforming ETFs. However, these writers typically fail to mention that commodity ETPs will actually outperform the spot market and make investors very happy when the futures market is in backwardation. A downward sloping futures curve, which has the awkward name of "backwardation" thanks to John Maynard Keynes, actually boosts the return of an ETP.

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Just for interest. The link below leads to Bloomberg's Henry Hub spot and front month forward price for natural gas. Since the DJ-USB indices are front month rolling, spot higher than the front month forward is good ("backwardation") for the index (which is the case right now), and the second ingredient one needs for success is then spot rising. As has been pointed out above, it is a double bet.

 

http://www.bloomberg.com/energy/

 

And here is the whole forward curve (spot can be read from the Bloomberg link):

http://www.cmegroup.com/trading/energy/nat...atural-gas.html

 

EDIT: Here a spot price chart.

 

http://www.markt-daten.de/charts/rohstoffe/erdgas.htm

ng-henryhub.gif

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Further to the chart above, there is a major spike up every 2-3 years, max. 5 years. So, we should expect one rather soon given that the last one was in 2008. Let's see whether it will be 2011.

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I got curious about the whole roll-over problem with ETCs. So I got myself some natural gas data and did a few calculations to analyze the situation.

 

I got daily data for NYMEX gas futures from 07/03/08, the high in 2008, to 07/12/10 (latest). The data I got was for the front month future and for the one the month after. Since the front month future expires 3 working days before the first working day of the next month, I could calculate the loss/gains from rolling the contract over each month (assuming that one holds 100% margin at the outset of each new contract). (See also: http://www.eia.doe.gov/dnav/ng/TblDefs/ng_...fut_tbldef2.asp )

 

On 07/03/08, the front month future traded at $13.58 (the 2008 high). On 07/12/10, it traded at $4.39, amounting to a growth factor of 0.3233, or a loss of 67.67%. This could be interpreted as the approximate loss in the spot price.

 

The roll-over loss due to contango (each time at the end of the month from switching the front contract into the following one, then compounded) was another staggering 65.34%, or a growth factor of 0.3466.

 

The total growth factor of the strategy was 0.1126, i.e. the total loss was 88.74%. Note that this was for a simple unlevered rollover forward strategy, like in the DJ-USB gas index. A double levered one would magnify this loss (as we can see from corresponding ETCs).

 

So, indeed, one has that the spot growth factor times the contango/backwardation gain/loss factor is approximately equal the total growth factor. (In theory they are not identical.)

 

So, over this period of almost 2 years, the loss from contango was as eye-watering as the actual loss in the physical underlying.

 

Next, I will try to find a "good" period, possibly with backwardation, where the situation would be other way round. But I can already tell from the charts, that those are very scarce.

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Sugar.

 

There's a double levered ETC on it too. Here two charts.

 

The underlying's spot price (the thicker line is inflation-adjusted):

zucker-typ1.gif

 

Recent performance of the double levered ETC (click to see):

http://www.boerse-frankfurt.de/EN/index.as...IN=DE000A0V9Y81

 

Same problem as with any ETC (contango, paper shuffle risk, ...) but it could be a nice gamble too. We're far off the 70s peak prices. I don't know anything about the fundamentals, but I think Jim Rogers likes sugar too.

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High up on my shopping list are (thanks to earlier replies):

 

-ETFS Forward Natural Gas (NGAF)

http://www.etfsecurities.com/csl/fwd/etfs_natural_gas_f3.asp

 

 

Hi GF,

 

I'm going to get some NGAF too but I don't think now is the right time.. IMO the latest move up is due to the cold weather in Europe. I have a gut feeling we'll see it drop back down to $7...

 

Also, if you already haven't looked into it Denison Mines might be a good addition to your Uranium portfolio. It seems to be a good prospect, but then I'm no nuclear scientist :)

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but I think Jim Rogers likes sugar too.

 

As far as I understand the principal reason he likes commodities, apart from the underlying fundamentals, is because his name is on a commodities fund (RJA). The fund charges a fee. When was the last time you heard a negative comment from him about any of these commodities?

 

Soybean Meal 2.15%

Canola 1.92%

Orange Juice 1.89%

Azuki Beans 1.43%

Greasy Wool 0.72%

Rice 1.43%

Barley 0.77% 44%

Oats 1.43%

Wheat 20.06%

Rubber 2.87%

Sugar 5.73% Corn 13.61%

Soybean Oil 5.73%

Live Cattle 5.73%

Coffee 5.73%

Cotton 11.60%

Soybeans 8.60%

Lumber 2.87%

Lean Hogs 2.87%

Cocoa 2.87%

 

From the prospectus;

 

Rogers International Commodity Index, RICI, Rogers International Commodity Index –Total Return and Rogers International Commodity Index – Agriculture Total Return are trademarks and service marks of Beeland Interests, Inc., which is owned and controlled by James Beeland Rogers, Jr., and are used subject to license.

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Also, if you already haven't looked into it Denison Mines might be a good addition to your Uranium portfolio. It seems to be a good prospect, but then I'm no nuclear scientist :)

Thanks for pointing out. I will look into it. :) As for the gas, it is a gamble because while I believe the next spike will come 100% guaranteed, it might be 1-2 years, maybe 3 years out. Personally, I think it will spike in 2011, or at least start to, so I am in for now. But as we have seen, when the commodity does not outperform, the fund loses.

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As far as I understand the principal reason he likes commodities, apart from the underlying fundamentals, is because his name is on a commodities fund (RJA). The fund charges a fee.

I would not really hold this against him. He is aligning his interests, that's ok. Don't you think he would change the strategy of his funds business if he saw enough reason to do so?

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No, I really meant European gas as in contrast to North American gas. The ETCs above deal in Henry Hub Futures only, as far as I understand.

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You own a gold exploration company. If you think that perhaps now is not a good time for either gold or gold exploration are you going to say it in public?

 

He's a very clever fellow, when oil was a huge bubble mid-2008 he took out a hedge against his short banks trade. The hedge he took out was long airlines - it didn't make sense until you realise that oil was in a bubble and that as soon as it collapsed airlines would rally hard as the principle factor depressing their price was their number one cost item decreasing in price.

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He's a very clever fellow, when oil was a huge bubble mid-2008 he took out a hedge against his short banks trade. The hedge he took out was long airlines - it didn't make sense until you realise that oil was in a bubble and that as soon as it collapsed airlines would rally hard as the principle factor depressing their price was their number one cost item decreasing in price.

OK, so you think he is mostly just talking his book and you think he was not honest when explaining the nature of his hedge in 2008.

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OK, so you think he is mostly just talking his book and you think he was not honest when explaining the nature of his hedge in 2008.

 

Talking his book yes, not dishonest, he just didn't explain why the airlines were such a good hedge as to do so would be contrary to his commodity bull position.

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NatGas

 

You would possibly think that those spikes in the spot price would have a lot to do with storage. But it doesn't really seem to be the case. At least what is called "Working Gas in Underground Storage, Lower 48" is steady like a clockwork. Does anyone know what other meaningful inventory figures are relevant for NatGas?

 

http://ir.eia.gov/ngs/ngs.html

ngs.gif

 

http://www.markt-daten.de/charts/rohstoffe/erdgas.htm

ng-henryhub.gif

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http://jsmineset.com/2010/12/13/cci-copper...rom-trader-dan/

Note that the CCI (Continuous Commodity Index) has run to its current level WITHOUT the participation of crude oil which at the time it made its all time high back in 2008 was trading close to $150. It is currently below $90. That is what is terrifying. We are in effect looking at the prices of food and metals in this CCI doing all the heavy lifting in the commodity sector. Heaven help us if energy prices, particularly natural gas which has been extremely cheap, take off.

 

clip_image00112.jpg

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This is the most bearish article on NG that I could find recently. He thinks prices will stay low due to more capacity and more supply through shale operations. However, he seems to see a few things in favour of higher gas prices too (coal switching). Anyway, I remember Zapata George (R.I.P.) who always was very bullish on NG. But then you find articles of experts like this, and ... Just from the price charts I think the situation is very bullish indeed, but I can't quite judge these kind of fundamentals (new shale gas projects etc.). A gamble it is ... :)

 

Christopher Jylkka: Bearish Winter For Natural Gas

http://www.hardassetsinvestor.com/features...41.html?topic=1

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Does anyone know what other meaningful inventory figures are relevant for NatGas?

 

You can see current demand etc. for the UK here. There are a couple of graphs relating to storage.

 

If you scroll down to the 'monthly tables' here, there are some spreadsheets detailing imports and exports.

 

 

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I can't quite judge these kind of fundamentals (new shale gas projects etc.). A gamble it is ... :)

 

'The Oil Drum' used to publish a monthly report, courtesy of peakoil.nl (I think). The last one was in August - it doesn't look like there has been one since. Here is August's: http://europe.theoildrum.com/node/6863

 

They had a section with world natural gas production. Looks like the source of the information was the 'Energy Information Administration' - same as your previous link. It does mention though, International Petroleum Monthly from the EIA. I didn't see that on the EIA site when I looked.

 

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Lots of commodities charts on here: http://www.indexmundi.com/commodities/

Unfortunately time series end in 1985, so you can't see the important heavy price action of the 1970s/80s.

 

I might go and buy some levered sugar today. I couldn't find any sugar yield curve, so I have no idea how bad contango is in the sugar world. Maybe even worse than gas?

 

My oil calls haven't done much so far. Everything else (uranium miners, levered gas) is slightly down. :rolleyes:

 

Regarding all the contango bullcr@p, how nice is it to just own physical bullion. :)

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http://www.indiansugar.com/briefings/wsm.htm

The ISO does not anticipate that the projected renewed global economic growth will significantly stimulate sugar consumption in the course of 2009/10, particularly taking into account high world market prices. Even so, global use of sugar is expected to reach 166.585 mln tonnes. Therefore, the growth in global production is far too small to cover anticipated increases in sugar consumption, and the world statistical deficit is expected to reach 9.425 mln tonnes as against 7.247 mln tonnes projected in November.

The table with the world sugar stocks as compared to the deficit on that page is also quite interesting. The trend does not seem to be sustainable at current low prices.

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I can't have an 'active' discussion, so to speak, as I am not currently in a position to buy/trade anything. Just thought I'd chip in with anything that may be of use.

 

Did you see this? Energy Information Administration - Independant statistics and analysis

 

Found this as well, not sure if it will help: Natural Gas Intelligence

 

I signed up for the ICIS Heren newsletter at work. It covers the gas, power, LNG and carbon markets. Hopefully this link will work http://epidm.edgesuite.net/RBI/chemicals/C...N_20101209.html

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http://www.indiansugar.com/briefings/wsm.htm

 

The table with the world sugar stocks as compared to the deficit on that page is also quite interesting. The trend does not seem to be sustainable at current low prices.

Sugar should do well if Oil does well as the Brasilians will use more of it for fuel and limit exports. What ag. isn't affected by oil prices!

 

Sugar is seasonal as well.

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