Posted by
Contrarian Guitarist on Saturday, June 07, 2008 1:48:00 AM
The index ETN - OIL, is at least partly responsible for irrational run-up of oil prices. An ETF is an Exchange Traded Note. What is OIL?
This is the description from it's Yahoo Profile page...
"The investment is linked to the performance of the Goldman Sachs Crude Oil Return Index as reflects the returns that are potentially available through an unleveraged investment in the futures contracts comprising the index plus the Treasury Bill rate of interest that could be earned on funds committed to the trading of the underlying contracts. The index is derived from the West Texas Intermediate (WTI) crude oil futures contract traded on the New York Mercantile Exchange. The fund is not diversified."
OK, I challenge anyone investing in OIL to restate that paragraph back to me in a manner to prove you understand what you are getting into. It's never been easier to invest in oil futures, everyone's doing it, everyone's getting rich! Well not so fast. Get ready for the next crash. The
Crash of 1987 was largely caused by program selling of large lots of stocks. Who owned all these shares? Investors? Nope.
Mutual funds. An investment vehicle that exploded in the 1980's ($48 billion in assets in the late 1960's - to $12.358 TRILLION in 2007). Computers executing programed selling went into a free fall. Since the system has installed "
circuit breakers" of sorts. I'm not aware of any such safeguards for commodities investors. So, um, look out.
Other funds like
USO, an ETF, that invests in futures contracts is also very likely to have an affect on oil prices. The inception date? April 10th, 2006. Check out it's chart
here. Only up. When did gas prices start going up again. Hmmm. Average volume? Almost 10 million shares a day, times a price of over $100 and that's a billion dollars every day being traded in this fund.
Find out who's buying and selling OIL and USO. Is it individuals like you and me or institutional investors?