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Strategies & Market Trends : Buy and Sell Signals, and Other Market Perspectives -- Ignore unavailable to you. Want to Upgrade?

To: Sergio H who wrote (35814)	8/2/2012 1:36:27 PM
From: Jopps	Respond to of 221931

Sorry, I should have been more clear with my previous statement. On the surface, UNG seems to be an acceptable instrument. It tracks the price point of natural gas at Henry Hub delivery point in Louisiana. But a little problem UNG does not track the price of nat gas exactly. It buys and holds nat gas future contracts , selling them into expiration. The funds are then spent purchasing more future contracts. There is nothing new about this, a lot of VIX ETNs work this way. And like those ETNs, it suffers from contango (since future contracts are usually more expensive the further out you go due to inherent market volatility). Google "contango" and you'll get a more detailed explanation, but the long and short of it is that UNG constantly has to sell its near term future contracts on the cheap and replace them with expensive ones. Unless the price of nat gas spikes in the short term, UNG will constantly decay. This decay isn't as bad as in some of the VIX ETNs, but unless you have an inside scoop that nat gas prices will rise in the very short term (that the general public isn't aware of), you shouldn't play UNG. What I suspect is that a lot of investors are looking at UNG as a long term, macro play on the inevitable rise of natural gas price that have been so low for so long. UNG is not a long term investment, it's not even a short term investment, it's not even an investment, it's a trading vehicle and a very risky one. Also look at the history of UNG price movement compared with the spot price of nat gas. It averages half the gains, while doubling the losses.