Why Would Soros Buy Gold Futures or a Gold ETF (GLD)?

A reader asked a great question about how or why Soros would choose gold futures over bullion or vice-versa?

Yesterday, I wrote two posts about George Soros and his recent gold purchase. One was how he did it, the other why he might have done it.

By owning the bullion via the SPDR Gold Trust (GLD), Soros owns bullion as the underlying asset – this is an investment, not a trade. He owns it outright and there is no margin requirement. If his prime broker settles the transaction in a margin account, Soros can lend the GLD shares to another entity that wants to sell short and exact a rebate for doing so (he’d never let the PB keep it all, if they get to keep any of it). This enhances his yield to own the GLD shares.

If he’d owned the same exposure in the COMEX futures market, he’d need to post margin, which he’d undoubtedly be able to do as it would be between 5% – 10% of the over $600 MM position he has. However, he may run up against a few other hurdles by doing so. One, he’d be right up against the maximum position limit in that one can hold in futures. Two, there may not be sufficient liquidity to move the type of size he might want to at a specific time.

In both investments he’d be able to stand for delivery and accept gold if he wanted to.

I think the main reasons Soros bought the bullion are as follows:

-he can hedge all/part of his position using futures in the short-term by selling futures against his long GLD
-he can lend the GLD to a short seller and capture incremental income via rebate, whereas GLD has no dividend yield
-he can very reasonably enhance his long position by purchasing COMEX gold futures in addition to his GLD
-no margin calls for GLD
-no carry charges for GLD, but has Trust expenses
-he most likely can accept the physical gold bullion against his GLD ( b/c of his size)
-tax treatment is more favorable with GLD (28% capital gains tax rate in taxable accounts)*

You, the retail investor, can buy GLD though a regular brokerage account – you don’t need to be approved for commodity futures trading, which may be a barrier for some given the financial litmus test that you must pass. Soros can pass the test.

*Gains/losses from the purchase and sale of commodity futures are subject to a blended tax rate: 60% is considered a long-term gain or loss, and 40% is considered a short-term gain or loss.


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