Mark Anthony From Stock Psychology: I am telling you something every investor should know, but no one has told you! Even the most successful investors like Warren Buffet or Jim Rogers has failed to tell you this important investment rule that you are about to hear from me. I believe Jim Rogersdoes not intend to withholding his investment know how from you, but he truly does NOT actually get it himself. It took me a while to get it as well.
When Jim Rogers pitched agriculture commodities and urged people to buy future contracts of those commodities, he did NOT know what he was talking about! I hope that some one close to Mr. Jim Rogers can bring my words to him and explain why he was wrong. I have high respect to Mr. Jim Rogers and I hope he gets what I am about to tell below. This is an investment mistake 99% of people make, including Jim Rogers himself.
If you believe something is bullish and want to invest in it, then you MUST own it outright.
Allowing some one else to own your investments for you, simply won’t cut it. Owning something “indirectly“, for example, by purchasing futures contracts, won’t cut it, either. If you don’t hold something outright, physically, under your own control, then you really don’t own it. If you don’t own something outright, then all you have is merely a piece of promise, written on a piece of paper. You are owning merely paper assets, not the physical assets. You should reject all assets that rely on a promise printed on a piece of paper, because a promise can be created out of thin air, and can just as easily vanish into thin air, with little or no repercussion to the one who breaks the promises, but tremendous loss to you who wrongly trusted that promise. Let me explain.
But first let me clarify that owning equities, i.e., owning shares of stocks of publicly traded companies, is NOT owning paper asset. The company, like the Stillwater Mining Company whose stock I own, is a real physical business entity, if I push a computer button to buy shares of (NYSE:SWC)through TD AmeriTrade, I do own a small piece of that company. My ownership is recognized as legitimate. If I have any doubt I can request physical stock certificate. If there is still any doubt regarding the ownership, then the stock should not be bought. So let’s make it clear, equities, as long as the ownership is not in question, are physical assets, not paper assets.
But all indirect ownership of physical assets, or ownership of derivatives of physical assets, are paper assets because they rely on a promise made by some body, written on a piece of paper. Take for example the physical gold ETF, the (NYSE:GLD), and physical silver ETF, the (NYSE:SLV). The respective investment prospectus claims these funds are backed by physical gold and silver, and hence owning shares of these two ETFs are equivalent to owning actual physical precious metal.
Maybe these ETFs are really backed by physical metals, maybe not. We don’t know. All I know is by owning shares of either (NYSE:GLD) and (NYSE:SLV), you are NOT owning physical gold or silver. Not at all. You are owning something which is based on a mere promise, a promise that some how some where in a secret location in the world there are a pile of gold or silver bars and those bars really do belong to you, but you have no way of knowing and you have no access to it. Those physical precious metal bars might as well be put on the moon and you can point to the moon and tell your grandsons that you really do own something on the moon, and that some one promised it to you, you just don’t have control or access to it.
Make no mistake about it: You are owning a piece of promise, not a piece of metal, by owning (NYSE:GLD) or (NYSE:SLV).It’s up to you to decide how much you can trust that promise and how much you value it. But to me, I don’t even trust my best friend to hold a few palladium coins for me, why should I trust some guys that I don’t even know personally to hold my precious metal in a fund called (NYSE:GLD) and (NYSE:SLV)? In the past I scrutinized the metal bars list of SLV and raised plenty of red flags. I determined that regardless whether those red flags have legitimate explanations, it is not worth risking my own investments to count on some Santa Clause keep a good promise.
Another categories of ETF funds are even worse. The (NYSE:GLD) and (NYSE:SLV) fund at least claims to be backed up by physical assets. But there are ETF funds which are backed up by nothing but paper. Most notably are the (NYSE:USO) fund for crude oil, and (NYSE:UNG) fund for natural gas. The (NYSE:USO) fund does not own a single drop of oil and the (NYSE:UNG) fund does not own a single cubic of natural gas. They own future contracts, i.e., promisesmade by some one, not physical commodities digged out of ground. Why do people buy these two funds and then expect to make profits when prices of the underlining commodity goes up, if there is not an ounce of the actual stuff involved? They don’t. I recognized that fundamental fact on Oct. 29, 2009. I advise you to read that article again. It was a very important lesson I learned.
Lucky for me, once I recognize why the investment based on paper will not work, I quickly unwound my entire investment in (NYSE:UNG), which was once the second largest position I held, without suffering any loss, and I never touched it again. In hind sight I have chills in my spine thinking what could happen had I not timely realized what’s wrong with (NYSE:UNG), and other similar paper based ETFfunds. Unlucky for many investors who still buy such paper ETFs thinking they are investing on the right thesis of bullish commodities, or bearish US dollar. These investors suffered great losses and will continue to suffer losses in the future, until they realize the problem with owning paper, or until they lose all their money, whichever comes first.
Notice what the prices of crude oil and natural gas were doing, since the low of March, 2009, and what were the share prices of (NYSE:USO) and (NYSE:UNG) doing, during the same period? Do I need to bring your attention to what (NYSE:FAZ) and (NYSE:FAS)has been doing over the long term? They are supposed to be a pair of opposite financial ETFs and they are supposed to run in the opposite directions, but over the long term, both run down. Same story with (NYSE:UUP) and (NYSE:UDN),the dollar up and dollar down funds. In short term they indeed run opposite to each other, but in longer term, both runs in the same direction: downward. All those are paper instruments based on nothing but mere promises made by counter parties. So why should any one expect to make money out these papers? Why do you think those counter-parties are nice Santa Clauses ready to deliver profits to you happily? They don’t. These paper instruments are gambling, not investments.
There have been recent criticisms on UNG, on GLD and on (NYSE:SLV), and even on USO. I share some of the criticisms on these ETF funds. But no one on Seeking Alpha has really touched the more fundamental reasons why paper-based, or promise-based ETFs, are fundamentally wrong as investment vehicles, regardless of the bullish fundamentals of the underlining commodities.
When it comes to investments, if you don’t hold it, you don’t own it. Please pause and think about it. Hopefully you learn something. Hopefully next time Mr. Jim Rogers tells you to buy agriculture commodity future’s contracts, you can help me to explain to him why he was wrong; why people should not buy this index or that index, or this or that ETF, or buy future contracts or other derivatives. Hoarding the physical stuff is the only correct way to invest in a commodity.
I still remember when I first pitched physical tellurium investment, many analysts, some well known, immediately asked me where they can buy tellurium futures contracts. I should have told them that I am quite happy to write up and sell them some tellurium futures contracts, at good prices, but they are not going to make money out of me. If you want to make money from tellurium, you have to purchase and hoard physical tellurium, just like I did. It is true for all commodities. It is true for all investments. If you don’t hold it, you don’t own it.
Therefore I reject virtually all ETF investments as legitimate long term investment vehicles. If you want to invest in precious metals, you have to own the real metals, or own stocks of the related mining companies. I am happy to see that I am now vindicated and will continue to do well in my insistence that palladium will be the best precious metal to invest in, and my insistence on the only known primary palladium producers, (NYSE:SWC) and (NYSE:PAL). It was not a love affair. It was a firm conclusion from my own objective investment analysis. I just wish that if investors are bullish on palladium, they should go out of their ways and purchase any ounce of physical palladium they can find, instead of counting on buying palladium future contracts.
Full Disclosures: The author owns (NYSE:SWC) as the largest position on his investment portfolio, and is invested in physical palladium metal. The author does not have position in (NYSE:USO), (NYSE:UNG), (NYSE:GLD), (NYSE:SLV), (NYSE:FAS), (NYSE:FAZ), (NYSE:TBT), (NYSE:UUP), (NYSE:UDN), and does not intend to enter any position either. Although the author hoards physical tellurium and is skeptical of (NASDAQ:FSLR), he holds no position in (NASDAQ:FSLR).