The Rise of Precious Metal ETF's and Lessons for Broader Industrial Metals Markets

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Every week or two I receive a “random inbound email from someone who happens to be passing through Chicago and would like to set up a meeting. Since many of these emails involve software or services outside our core business, I tend to ignore most of them. But when I had the opportunity to meet up with Will Rhind of ETF Securities, I knew I’d learn something. For those of you not familiar with ETF Securities, they offered the first physically backed precious metal ETFs including gold, silver, platinum and palladium for the US market. Yawn some of you are saying “Lisa, we don’t buy precious metals who cares. Well, that statement may apply to most of you but we’d argue gaining an understanding of how these commodity ETFs work and how they can (or can’t as the case may be) impact industrial metals markets applies to any sourcing organization and in some cases, to any company for that matter. Here is why¦.

First, Will mentioned that many corporations have parked their cash so to speak in commodity ETF’s as a means of hedging global financial risk. Though I argued companies probably have less fear of that today then say 12 months ago, I’m sure Will is correct in that Treasury departments in major corporations have begun to reconsider their own risk mitigation strategies. That may include diversification for which commodity ETF’s offers a means of doing just that.

Second, for better or worse, the rise of physically backed ETF’s has impacted prices. Though Will quickly pointed out that many folks ignore the fact that a bigger and faster growing bar and coin market exists, nevertheless, ETF Securities’ four US precious metals products have received inflows of over $1.3b. By investing in the underlying metals (the metals are stored in Switzerland) price direction has come from the “long positions taken by investors. We recently covered the rising palladium market. But Will also suggested that prices for palladium may also be high because the Russians don’t have as much stock as some previously suspected (logic being that if they did have stocks, now would be a good time to offload them given rising price levels). So to some extent, the increase in palladium prices may very well indicate the supply situation looks less rosy than previously thought.

But the points I found most interesting in my discussion with Will involved the differences in perception between the US and European markets for these products. Only in the US has Will encountered a number of conspiracy theories typically centered around the notion that the gold (and other metals) held by these funds either a) doesn’t exist or b) isn’t authentic. No doubt this stereotype stems from the Great Depression when Franklin Roosevelt issued Executive Order 6102 essentially ordering US citizens to hand over their gold to the Federal Reserve for $20.67/oz (failure to do so would result in a fine, up to ten years in prison or both) When I mentioned our coverage of tungsten filled gold bars, Will laughed saying, “So you are the source of all the phone calls we receive on that subject! But ETFs remain subject to US bank regulation and could not operate in the US if the underlying commodities didn’t correspond to the financial product offered.

For now, the base metal ETFs can be classified as “synthetic in other words, they either mirror what happens on the futures exchanges or comprise a mix of producers whose stocks comprise the ETF basket. These do not impact prices.

What plans does ETF Securities have for the future? Will mentioned several times the company has over 180 commodity products currently offered abroad and they seek to create that one-stop-shop for the US market. What does this tell us about metal ETF’s? We take it as a signal that these financial products both synethetic and otherwise remain in a growth cycle.

–Lisa Reisman

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