As listening to a story on the radio about how a few companies (JPM, iShares) are trying to develop and launch an ETF backed by physical copper. They are being sued by various organizations to stoo them from doing so, as this would undoubtedly drive up the price and increase the speculation on a material that is vital for all kinds of industrial purposes, including manufacturing and construction. As someone who has traded commodity-backed ETFs in the past I've struggled with the pros and cons:
Pros
- Increased cost decreases consumption, and cuts down on waste, which are both good for the environment
- Increased cost will incentivize research into newer, better and more efficient alternatives.
- adding market exposure normalizes prices in the long term and is beneficial to producers
- This is another investment vehicle for those looking to add commodities to their portfolio
Cons
- Speculation in essential raw materials makes it cost-prohibitive for developing nations to build necessary infrastructure
- higher copper costs could slow down manufacturing and construction, which are two vital aspects of the economy,
I was curious as to what the MMM community thought about this topic.
*disclosure - I've invested in GLD, SLV, CORN and USO in the past and have made some money trading swings in their underlying commodity prices.
I've purchased some natural gas ETFs. One was in the form of a limited partnership that wound up losing about 98% of its value, due to the way it tracked the price. The devil is in the details when it comes to how the ETF tracks the commodity (either physical storage or buying different futures contracts).
For the arguments about it driving up speculation/costs, has it had any impact to gold, silver, platinum? How about oil? While gold is mainly consumer-driven, and silver/platinum has a large industrial demand (relative to gold), I don't think people are screaming that ETFs and even the futures markets are disrupting equilibrium pricing in the long run.
Could there be a short-term disequilibrium of, say, 2-4 years as the initial interest settles down? Sure, there probably will be. And there will be more retail investor interest in commodities if they're available in readily-tradable ETFs versus having to trade futures with those requirements. But I don't see prices doubling over 3 months, and then staying that far above 'natural consumption equilibrium' for the next 50 years.
People could say the same thing for futures contracts. When I was in school, I remember being told that most futures contracts that trade in commodities don't actually settle for the physical transfer of the goods (remember: futures exchange contracts settle for transferring the goods at a specific location - you can't just buy a contract for 10,000 eggs, and have someone come pick them up in middle-of-nowhere, Arkansas). So many/most(?) futures contracts are only used for hedging by many producers/businesses. While a copper ETF likely wouldn't be used for hedging by the mining companies (likely more efficient to use futures markets), it could be used for companies that use significant amounts of copper, but don't have the desire/usage to fool with futures.
