Two Investments To Avoid At All Costs...
The Dynamic Wealth Report
March 24, 2010
by Justin Bennett, Editor
Think of things you try to avoid…
A few things come to my mind. How about playing golf in a lightning
storm? Not the smartest thing in the world.
What about swimming with Great White sharks? Yeah, that doesn’t sound so
‘great’ to me.
Shaking a hornets’ nest just to see what happens. Uhhh… I don’t think
I’ll be doing that anytime soon either.
The risks of doing these things are obvious to a rational person. Most
people would avoid them.
However, there are things in investing just as risky as shaking a
hornets’ nest. Yet people do it over and over again. Why do they do it?
Because the risks are hidden…
What am I talking about? There are two ETFs focusing on natural gas
that aren’t what they seem.
Natural gas is a commodity with a potentially bright future. Some say
it’s the fuel of the future for the United States. There’s even
legislation in Congress (HR 1835) that would change the way Americans
use natural gas. The demand for natural gas could skyrocket in coming
years.
So how does the individual investor capitalize on this opportunity?
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You could buy the iPath Natural Gas Total Return ETN (GAZ). According to
the prospectus, this ETN is designed to “reflect the returns that are
potentially available through an unleveraged investment in the futures
contracts”. In the case of GAZ, the futures contracts are in Henry Hub
Natural Gas.
Seems like a good idea, right? Just buy this ETN and you’ll get the
returns one would get by actually buying the futures contracts. If
natural gas goes to the moon, you could make a huge return on your
investment.
We also have the United States Natural Gas Fund (UNG)…
According to the prospectus for UNG, “The United States Natural Gas Fund
LP is an exchange traded security that is designed to track in
percentage terms the movements of natural gas prices.” UNG also
accomplishes this through the use of futures contracts.
These ETFs are a great way to capitalize on the boom in the natural gas
industry… or so you would think.
Here we have the relative performance of three natural gas
investments...
As you can see, the actual price of natural gas is
currently up around
40% from early September 2009. But take a look at the two other lines. That’s the performance of UNG and GAZ in the same time frame.
Why would both UNG and GAZ be down over 20%?
What’s going on? Well, the answer is a bit complicated. Let me explain…
You see, in the futures markets, there’s something known as ‘contango’. It’s when
the price of far month contracts are trading at a premium to the
‘spot’ price. This premium rises and falls with the perceived supply in
the market.
A new drilling technology called “fracking” is allowing nat. gas
drillers to find more gas than ever before. This huge supply of gas is
causing a large contango in gas prices.
Remember, UNG and GAZ use futures contracts to track the price of
natural gas. The managers of the fund have to buy the
far month contract
at a huge premium due to the large contango. As the month progresses, the
premium disappears. The price returns to spot, which is the current
price for natural gas.
This causes UNG and GAZ to drastically underperform the actual natural
gas market.
As long as the
huge contango continues in the natural gas market, UNG
and GAZ will underperform by a large margin.
Folks, I wouldn’t be surprised it both UNG and GAZ go bust at some
point…
Now you know the risks of these two ETFs. Like other obviously risky
things in life… avoid these two ETFs at all costs!
• Palladium (Over $450 an ounce)
With the recent surge in the dollar, many commodities are getting hit. Yet, palladium is still trading near 52-week highs. The precious metal is
widely used in the automobile industry as a coating for catalytic
converters.
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