Average Joe smacked by contango, pre-rolling, and sharks profiting off "the dumb money"

Here's another good reason to invest in tangible assets such as gold and silver bullion. "Commodity ETFs make lousy buy-and-hold investments," according to a Bloomberg News expose that explores complicated trading practices such as "contango" and "pre-rolling."

After losing a chunk of his investment in an oil-based exchange-traded fund, Gordon Wolf, a 68-year-old psychologist in Napa, Calif., decided to do some homework. "If it wasn't a rigged game," he says, "I could figure it out. But it is a rigged game."

"Contango," Wolf learned, "is a word traders use to describe a specific market condition, when contracts for future delivery of a commodity are more expensive than near-term contracts for the same stuff. It is common in commodity markets, though as Wolf and other investors learned, it can spell doom for commodity ETFs."

The Bloomberg piece also notes: "Professional futures traders exploit the ETFs' monthly rolls to make easy profits at the little guy's expense. Unlike ETF managers, the professionals don't trade at set times. They can buy the next month ahead of the big programmed rolls to drive up the price, or sell before the ETF, pushing down the price investors get paid for expiring futures. The strategy is called pre-rolling."

And pay attention to this startling quote from Emil van Essen, who runs a commodity trading company in Chicago: "I make a living off the dumb money. These index funds get eaten alive by people like me," he says.

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