Anyone who owns Elements MLCX Gold ETN (GOE) needs to be aware that the price is likely to drop more than 90% very suddenly.
The one thing that separates ETFs (and ETNs) from closed-end funds is the ability to keep price and “indicative value” closely aligned through a creation/redemption process. ETFs have “authorized participants” with the ability to exchange shares of the underlying asset for shares of the ETF (when the ETF is trading at a premium) and vice-versa. This arbitrage mechanism is lacking for closed-end funds, so they are always trading at a premium or discount.
I recently pointed out that MacroShares trade at premiums and discounts, but they at least have a logical explanation. However, Elements MLCX Gold ETN (GOE) is trading at a 1,000% premium for no apparent reason.
Checking their website for news doesn’t help, as the latest press release is dated October, 2008. The FAQ explains that a daily NAV is not calculated, so the “indicative value” will be used for the purposes of determining repurchase price.
The note issuer for GOE is Credit Suisse, and the distributor is Nuveen. The prospectus indicates that the offering is for $250 million (250,000 shares at an initial price of $10). It appears that there are only 50,000 shares outstanding, so issuing more shares should not be a problem.
Keeping the price aligned would seem to be a simple task of:
- issuing more shares
- sell them on the open market
- collect an outrageous premium
- repeat as necessary
Eventually the premium shrinks to the point of making it no longer worth the effort. That is how ETF/ETN price arbitrage is supposed to work. The price versus indicative value discrepancy started to creep in during the first week of February and has been accelerating ever since.
So why aren’t Credit Suisse and Nuveen issuing more shares to take advantage of this huge premium? An Elements representative states there are two problems causing this: 1) the market maker has run out of inventory, and 2) the issuer (Credit Suisse) has decided not to issue any more shares.
In other words, Credit Suisse is about to shut down this fund. They have stopped issuing new shares, but they haven’t announced the fund’s closure yet. The irrational volume in February allowed GOE to escape the latest issue of ETF Deathwatch.
When the fund closes, remaining shareholders will be liquidated at the indicative value. Additionally, Credit Suisse could decide to start issuing shares again. Either way, the price of GOE will eventually return to its indicative value. Meanwhile, another 20,500 shares exchanged hands today, pushing the price to $114.90 while the indicative value is $10.05. Someone is about to get hurt.
Disclosure: No position.