Commodity funds 'could be next bubble to burst'

[CHIMO]

A growing number of funds that invest in commodities such as coffee, gold or even pigs, are coming under the scrutiny of regulators who fear they could be the next financial bubble to burst.

Industry insiders have warned the Bank of England that some funds may not have enough collateral to return investors' money and some of the smaller operators might be committing a form of fraud.

More than 300 Exchange Traded Funds (ETFs) and Exchange Traded Commodities (ETCs) are listed on the London Stock Exchange, with their shares owned by hundreds of retail and institutional investors.

"We can be certain ETF frauds are developing now," said Jonathan Compton, managing director at London-based Bedlam Asset Management. "Even worse, the structure of the market makes the fraud easier. Often, for tax and stamp duty reasons, as well as cost and finding the right legal framework, many ETFs are listed in one country, the management resides in a second and the commodity or securities are held in a third."

http://www.guardian.co.uk/business/2010/jan/31/commodity-funds-warning

Something to consider. Something is certainly going on with the indices.

[madrchsod]

1. commodities will cut one down in a heart beat

where i live every couple of years there`s a commodity trader getting arrested. the last traded took 2-3 million from investors. the guy bet wrong!

[Warpy]

2. I decided a long time ago that commodities gambling

was best left to the investment houses and other institutions that could afford to lose if the bet went wrong, as it so often does in the commodities market.

It's obvious that oil and gold markets are being diddled, but don't tell that to the gold bugs.

My guess is that the big money is already out and the suckers will be holding the empty bag again very soon.

[INdemo]

3. Except for oil commodities..That's a private club full of inside traders

and thanks to the 2004 energy bill veteran investors need very little margin money to bet on the price changes..both long and short..

[Art_from_Ark]

5. So the gold market is "obviously" being "diddled"?

Who is the culprit doing the "diddling"? Swiss bankers? China? India? Survivalists? Cash4Gold telemarketers?
Inquiring minds want to know.

[bemildred]

4. All bubbles burst. Like any other Ponzi scheme.

The trick is getting out near the top. The commodities bubbles (gold, energy) are not that big by historical standards, yet. It is good of these guys to point out the facts.

[Art_from_Ark]

6. Why is gold a commodities bubble?

Given the trillions of new dollars being cranked out, in addition to all the other fiat currencies that are backed by little more than investor confidence, what would you consider to be a fair valuation for an ounce of gold? And why?

[bemildred]

7. I said that it's arguable, so if you want it not to be a bubble, that's fine with me.

Buy more gold, have a good time, it has done rather well lately, then it gave a bit back, I don't claim to know what it's going to do next.

FWIW, I tend to think I'm looking at a bubble when the price graph looks sort of "exponential", like say July to December last year for gold. On the other hand, like I said, the actual runup was modest by the standards of the HiTech bubble or the real estate bubbles or various other "mature" bubbles like tulips.

[Art_from_Ark]

8. Gold is unlike all the other commodities you mentioned

in several key areas:

Unlike stocks or tulip bulbs, it cannot be artificially or naturally produced.
The gold market is not something that the average Joe or Jane can really participate in to any great extent, except through ETF's, which I avoid like the plague since they are not tangible gold.
Unlike pump-and-dump stocks, there aren't a handful of hucksters who can just make a market on their own.
Except for the past few decades, gold has been considered real money since coinage was invented.

Having had in interest in gold since I bought my first gold coin in 1968, when gold was $35 an ounce and common British sovereigns were listed in coin catalogues at $12, I have seen a bubble (1979-80). In those days, it was mainly European central banks that were playing the manipulation game. I'm sure they made a nice killing on that bubble. But now with transparent restraints on EU central bank gold dumping, investors who had been on the sidelines feel more comfortable investing in gold, considering that the paper money they hold is only backed by investor confidence. Furthermore, considering that the value of all paper money currencies has eroded considerably in the past 40 years (and many, like the currencies of Argentina, Brazil, Serbia/Yugoslavia, and most recently, Zimbabwe, have been demonetized and rendered completely worthless at least once during that time), it is no surprise that people around the world want a monetary instrument that is more solid.

The wild cards here are mainly China and India, now that the European banks have dropped out of the market manipulation game. Personally, I'm a little wary of Chinese involvement.

[bemildred]

9. Well, OK, it's a commodity, like the OP talks about.

And there is certainly a great deal of hype about it, and certain parties are still in a position to nudge things in the direction they prefer. One ought to be on ones guard. One ought not expect regular interest payments. One needs to be prepared to find a suitable buyer when in need of liquidity. I mean it's easy to sell, but can you get the best price anywhere you walk in to? But your arguments have some merit too, I don't deny it. All money is "faith-based", and has been for some time now, with a few notable exceptions which are worth way more than their nominal value. The truth is you can make bigger bucks playing oil or real estate bubbles, that sort of thing, but the downsides in those are much more eviscerating too. Gold is really about having something that will not turn to shit in your hands, it's not about the big immediate ROI.

[Art_from_Ark]

10. Of course, there are no regular interest payments on gold

But what is the interest payment on a bank CD these days. The last time I checked, which was just a month ago, I had to have a considerable sum tied up for several years in a CD just to make 1% interest.

As for cashing in, one does need to know where to sell for the best price, so that should be part of anyone's homework before they invest anything in gold.

And speaking for myself, I don't really care for bullion at the present time. At these prices, I would rather get collector gold coins, many of which are selling for close to the bullion price.

[Xolodno]

11. Thats one of the reasons why it screams "BUBBLE" at me...

There are two reasons primarily to buy gold.

1. Fearing that the currency (and possibly the country) will go under. Gold is still a universal currency of sorts (or for that matter most precious metals and gems). You want the mineral primarily for fleeing and exchanging. Then I would argue, you should buy more silver instead and rare gems. Buying food with gold tends to attract attention and gems are a lot easier to carry and hide with you if you need to make large purchases without attention.

The other reason...

2. Hedge against inflation, its an easy commodity to invest into that will hold its value vs. inflation. With that being said....The interest rate is determined by a) demand/supply for capital and b) Current inflation. With interest rates running around at 1% it means inflation is not the cause....at least not yet.

Thus drive in price is likely to be reason #1. Should the economy recover, investors who have there capital tied up in gold will begin to sell it should they see the return on investment greater than the return on gold (or they panic and think the gold "bubble" has burst or both).

[Zynx]

12. Gold, like any asset, is subject to periods of rampant speculation.

Expectations about future value drive the price just as they do with stocks, bonds (to a limited extent), and other commodities. These expectations can either be poorly informed or based on irrational fears/hunches. Unlike many asset prices, more often than not there is almost no sound economic trend that can predict its price. The phrase "long term trend" and the word "gold" should never be in the same sentence.