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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: ild who wrote (48917)	1/6/2006 1:45:43 PM
From: ild	Respond to of 110194

Global: Fleeting Lessons Stephen Roach (New York) Asia/Pacific: Liquidity Receding Andy Xie (Hong Kong) morganstanley.com

To: ild who wrote (48917)	1/6/2006 1:52:18 PM
From: aknahow	Read Replies (1) \| Respond to of 110194

Not really arbitrage for the participant broker dealers. It is a pre arranged, contractual agreement, that allows them to deliver gold to receive shares and shares to receive gold. This arrangement would keep the premium low even in the absence of arbitrage by others. True arbitrage would mean buying gold and selling shares, but given transaction cost, including timing of trades probably means little true arbitrage exist for GLD shares. CEF provides or at least provided an opportunity for imperfect arbitrage, given the large premium. Not knowing the exact composition of holdings would have made arbitrage less than perfect. Participant broker/dealers, i.e. those that have signed agreements with State Stree and the GLD ETF have no need for large premiums or even hope that selling shares and buying gold will bring the premium down. No, rather they know they can deliver gold and get new shares at no premium to cover shares that were sold short, by them, at a premium. Everyone wins, Statestreet has a more marketable product because of having a small premium, the buyers win for the same reason and participant brokers earn a small but steady guaranteed profit. I am almost always careful to spell out that GLD make no decision about buying or selling gold. Nor do the brokers care, for this segment of their business. GLD is not a gold mutual fund, buying and selling gold. It holds gold for the owners of GLD shares. When more people or institutions buy shares of GLD, this causes the premium to rise and new shares to be issued to the participant brokers, who have already sold them to buyers.