Falling Apples and a surfeit of gold

According to legend, King John of Magna Carta fame (1166-1216) died of a surfeit of peaches. This was after his grandfather, Henry I died of a surfeit of lampreys (eels), of which he was ”excessively fond.” Surfeit, meaning excess or overindulgence, is a perfect word for the investor gold rush of recent years. With this precious metal finally falling in price this week, we will look at what funds are doing in the wonderful world of gold related ETFs.*Is there is a prediction that gold is teetering on the brink?

Separately, news of Steve Jobs’s resignation from his Apple CEO role is a sad day, and we will see if this other stable ‘long’ position is subject to any interesting trading. Lastly, as we head into the apple picking season, we will look to see if the non BBQ summer has dented cider sales for C&C group.

Physical Gold ETFs

The amount of money invested in SSGA’s Gold Trust (GLD) is very close to the total assets in the instrument, which tracks the S&P 500 (SPY) at USD 71bn. GLD issues shares in exchange for deposits of gold. On August 10th, there was an unusually large rise in short selling by 250% to 18m shares. This position was then immediately covered as gold began its recent ascent to $1,917.9 on Monday of this week. There has been little activity in this ETF’s other listings in Hong Kong, Singapore and Tokyo.

Another large and physically backed (i.e. owns gold) ETF is the iShares Comex Gold Trust (IAU). This has sporadic spikes in short interest, and these spikes have increased in their frequency over this past quarter, showing some evidence that the need to hedge or short gold is more frequent than it was. If we look at the number of securities lending transactions, we see a 20% increase in the number of loans in GLD in the last week alone. The absolute rise in shares short might not be that cataclysmic, but more trades might well mean more positioning, which translates to nervousness that the gold price cannot sustain such lofty levels. The equivalent rise in trades in IAU is 84% since last Thursday – a huge change.

Leveraged Gold ETFs

Not for the faint hearted are the products on the market that allow the investor to double his gains if gold goes up. The Proshares Ultra Gold (UGL) offers this very thing – 200% of the return of the movement in gold. If you think gold is due to fall in price, then shorting this ETF offers a racey, if lop-sided return. There have been various spikes in demand to short this name, even quite recently, but this only equates to 60k shares. There is action too in the Deutsche Bank Powershares Gold Double Long ETN (NYSE:DGP), but there was much more borrowing back in the spring than now.

Apple Inc

The short position in Apple is…extremely low and remains so. Funds who lend are tremendously loyal and steady holders of AAPL, with there rarely being less than 200m shares (or 21% of the company) in Custodial lending programs. This is a notable contrast to Hewlett Packard,where funds who lend have been consistently reducing their holdings over the past year - a testament to the skill with which Mr. Jobs has steered his pioneering ship.

Apples for cider

Lastly, as we approach the autumn apple picking season, we can reflect upon the fortunes of one of Europe’s major vendors of cider to bars and restaurants, C&C Group. The owners of Magners are not subject to significant short selling despite the soggy summer in the UK and Ireland. Watch this space!

Final Word

True, there is far from a massive short position is these gold ETFs, butthe data points to some evidence that certain gold investors are suffering from “an uncomfortably full or crapulous feeling due to excessive” investment in this precious metal . This is evidenced by rising short selling transactions and some rising short interest. Depending upon what Fed Chairman, Ben Bernanke has to say at his Jackson Hole summit, they could feel this more and more.

*It is complicated as to whether gold related exchange traded instruments are funds, commodities, certificates or notes so I will use ETF throughout for simplicities sake