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Wednesday, May 4th, 2011
one-way trades

On Friday I was having a discussion with someone about one-way trades.  Since we happened to be having coffee in a small town on the prairie, the talk was mostly focused on farmland (where each new transaction is further away from a generous interpretation of the economic fundamentals) and grains.  However, we covered the precious metals too, especially silver.

Sunday night (before that other news Sunday night), silver collapsed, and has been extremely volatile since then.  Unlike most of the last few months, it is decidedly two-way volatility, with an emphasis on the downside.

The tumult has caused significant moves in related vehicles, especially those with embedded leverage or that were trading at a premium to net asset value (NAV).  Above is one such example, Central Fund of Canada, a closed-end fund that invests in gold and silver bullion.  (Sporting an ironic ticker for a CEF, namely, CEF.)

As I’ve written before, it is hard to make a case for buying any closed-end fund at a premium if there are alternatives available.  When a one-way trade in them reverses (whether temporary or not), a double-whammy can result.  (Chart:  Bloomberg terminal, as of 5/3 close.)