There have been a number of reports in the gold bug-blogosphere that the CME’s Comex exchange now accepts SPDR GLD exchange-traded-fund units as part of their delivery settlement process.
Par exemple, from GATA’s website (our emphasis):
GATA board member Adrian Douglas discloses in the report below, titled “The Alchemists,” that the New York and Tokyo commodity exchanges have been permitting their gold futures contracts to be settled not in real metal but in shares of gold exchange-traded funds (ETFs). This essentially allows the gold shorts (and the exchanges themselves, which guarantee futures contracts) to transfer their obligations to third parties that may not have the metal they claim to have and that, in any case, are operated by the investment banks running major short positions in gold. Thus it is likely that the paper claims to the world’s supply of gold are greater than even GATA has suspected — that the gold supply is even more oversubscribed and that “paper gold” is being created at an ever more frantic rate to suppress gold’s price.
Quite an allegation. Except, it’s not really the case at all.
The Comex exchange does not and – as far as we can tell - has never accepted ETFs as part of their delivery process. As the CME, the owner of the exchange, explained in a notice put out on July 22 to clarify the matter (our emphasis):
SUBJECT: REMINDER — Interpretation of COMEX Division EFPs: Gold-Backed Exchange-Traded ETF Shares Accepted as Cash Leg of EFP New York Mercantile Exchange, Inc. (“NYMEX”) Notice to Members 05-50, published on February 22, 2005, provides an interpretation of Exchange of Futures for Physical (“EFP”) transactions traded on COMEX to confirm that the Exchange would accept gold-backed exchange-traded Funds (“ETF”) shares as the physical commodity component for an EFP transaction involving COMEX gold futures contracts, provided that all elements of a bona fide EFP pursuant to Exchange Rule 104.36 are satisfied. For your convenience, NYMEX Notice to Members 05-50 is being re-disseminated below. Should you have any questions, please contact Anthony Densieski at (212) 299-2881.
Interpretation of COMEX Division EFPS: Gold-Backed Exchange-Traded ETF Shares Accepted as Cash Leg of EFP Exchange Rule 104.36, which governs exchanges of futures for physicals (“EFP”) transactions on the COMEX Division, refers to a “physical commodity” as one of the required components of an EFP transaction but also indicates that the physical commodity need only be substantially the economic equivalent of the futures contract being exchanged. The purpose of this Notice is to confirm that the Exchange would accept gold-backed exchange-traded Funds (“ETF”) shares as the physical commodity component for an EFP transaction involving COMEX gold futures contracts, provided that all elements of a bona fide EFP pursuant to Exchange Rule 104.36 are satisfied. Thus, acceptable gold-backed and exchange-traded ETF funds include, but are not limited to, the iShares COMEX® Gold Trust (ticker: IAU), which began trading on the American Stock Exchange on January 28, 2005. That trust is an exchange-traded fund that provides a means of obtaining a level of participation in the gold market through the securities market. The trust shares are intended to constitute a means of making an investment similar to an investment in gold. Each trust share represents a fractional undivided beneficial interest in the trust’s net assets which consist primarily of gold held by a custodian on behalf of the trust. The shares of that trust are expected to reflect the price of gold less the trust’s expenses and liabilities.
Now, to the unfamiliar eye that might appear quite scary, but what the notice states is that the CME accepts ETFs only as part of the cash leg of off-exchange exchange-for-physical (EFPs) transactions that are conducted via the exchange.
Exchange-for-physical is not quite the same thing as physical delivery: it’s a bilateral over-the-counter agreement taken up voluntarily between counterparties – usually, for the purpose of trading the basis (difference) between the physical and future position.
EFPs are standard practice in the oil industry. They are used, among other things, to hedge different crude types with futures, which would otherwise only guarantee delivery of one particular benchmark.
In fact, the whole point of an EFP is that you don’t necessarily have to take delivery of the underlying benchmarked commodity – although you can if you wish.
Accordingly, there is nothing insidious about the CME offering participants the opportunity to exchange-for-physical with an ETF. In all circumstances there is a willing counterparty happy to take ETF units on in exchange for futures. That is to say, there is no ‘forced’ delivery of ETFs to futures holders.
Although that doesn’t mean there isn’t a constant and very lucrative basis-trade to be played – between the value of gold ETFs and gold bullion – via that process.
Related links:
Getting to the bottom of negative gold-leasing rates – FT Alphaville
The problem with commodity ETFs – FT Alphaville