Beyond Gold Trading... E-Micro Gold Contracts (GLD, IAU, PHYS, CME)

Exchange traded funds cover almost every strategy that the retail investor can imagine.  If you can’t find an ETF, there may be a futures contract out there to trade an instrument.  As if the myriad of gold ETF instruments that allow investors to get direct price exposure to gold were not enough, now there is a mini or micro futures contract for investors.  Retail investors generally trade gold in ETF products like the SPDR Gold Shares (NYSE: GLD), the iShares COMEX Gold Trust (NYSE: IAU), or even via the ETFS Physical Swiss Gold Shares (NYSE: SGOL).  Just this week we noted how much of a critical mass these have reached and by some counts the physical (and representative) gold ETFs are probably now close to a combined $60 billion in bullion assets.  The SPDR Gold Shares currently holds more gold reserves than both China and Switzerland and it would come in as the sixth largest central bank holder of gold if it was a government entity.

Slice it and dice it.  This week marked the launch of a futures contract based upon a smaller denomination of gold from the CME Group Inc. (NYSE: CME) so that the price entry for trading gold could be lower.  The launch of the E-micro Gold futures is offered for incremental access to ownership of a 100-ounce bar of gold, and it is based on ten ounces of gold rather than 100.

That makes this new futures product one-tenth of the size of the gold price benchmark measured by the COMEX Gold futures contract. The CME release even notes that this gives individual investors a lower-cost and less capital intensive instrument to buy and sell gold versus the standard-sized contract.  The new contracts have the same tick size, same deposit location, and the same expiration days as the larger contracts.

A difference between this new contract and traditional futures is that this does not offer delivery of 10 ounces of gold, but ten contracts do allow delivery.  Ten contracts can also be converted into an official COMEX licensed gold warrant that represents “an actual serial-numbered bar of gold.”

Getting the word out is one thing for a new version of a trading instrument.  How else can you make the action pick up?  Dropping the fees.  The CME said that all fees will be waived for the first six months of extended COMEX trading hours and that it will waive all fees during COMEX trading hours for the first six months.  Just like the drug dealer business model, don’t charge anything for a while… nail them when they come back for more.

Leave it Wall Street.  If there is a way to chop something up so that a bet can be made, the mathematicians will figure out a way to make it smaller.  What is so strange here is that it seems that there are already enough vehicles to invest in.  Oh well, everyone wants a piece of the action.  Let’s  just all hope that one of these smaller instruments can’t be manipulated in a manner that they can be used to lead the physical product and larger instruments meant to track the underlying gold price.

Options trading in the SPDR Gold ETF out-of-the-money contracts are another way that traders already get upside exposure to gold price moves without putting in so much money.  If you don’t believe it, then ask why there are more than 85,000 contracts in the open interest of the JANUARY-2011 $150 CALLS.  That represents bets on 8.5 million shares worth of the SPDR Gold ETF on a fully leveraged basis.

Why isn’t Las Vegas in this game?  Wouldn’t it be convenient if you could just stop at a table at 8 AM and say “I want to bet that gold will be higher by the end of the day!  What are the odds?”

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JON C. OGG