Copper Caper

ETF 有風險 !
港股市場有 X 的ETF風險更大 !

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Judging by the first couple of hours of Wednesday action, the pattern was about to go into ‘instant replay’ mode again. Although crude oil made a notable advance this morning, breaking through the $90 mark and moving to its highest level in over two years, the remainder of the commodities’ complex exhibited mixed but still shallow price performance and thinning participation ahead of the holiday period.

Well, the US economic data did surprise to the upside, but only just. The revision of the Q3 GDP figure lifted the pace of growth in the US to 2.6% (versus the 2.5% previously reported figure). Several surveyed economists had pegged the number to show as much as a 3% GDP growth rate for the period. However, when accounting for an upward revision in US imports, the net result was that which the markets learned this morning.

No such luck for the UK economy, on the other hand. The British GDP rose 0.7%, exhibiting a larger-than-estimated slowing on the aforementioned quarter. The Bank of England remained split on policy, as minutes of its Dec. 9 meeting came to light. Great Britain is in the midst of the biggest squeeze on its budget since the Second World War. British consumers slowed their spending, as did the country’s government. And now, the snow cometh. Bad weather could affect not just travel to and from the UK but the shopping sorties of the country’s denizens leading up to Christmas.

At any rate, the majority of tracked assets this morning showed mini-moves of from 0.20% (the dollar, copper, gold to less than 0.5% (crude) as the preoccupation with book clean-up and the office cookie-tray took precedence over fresh position commitments to various assets among players. The US dollar fell slightly in the wake of the GDP data. Overseas, the euro received a bit of a lift following Chinese statements that it will commit to supporting the common currency during this difficult period, and that it will actually buy significant amounts of Portuguese debt (perhaps as much as 5 billion euros’ worth of it).

Cotton and rubber futures fell fairly hard, wheat gained, and copper traded somewhat lower prior to the release of US GDP data this morning. Black gold’s gains were based mostly on projections that the US economic picture would show a sufficient degree of recovery strength to warrant price optimism for the commodity. In other news, US existing home sales rose 5.6% in November –close to consensus, but still nearly 28% under one-year-ago levels. The current 4.7 million annualized sales rate is thought to have to rise past the 5.2 million level in order for economists to conclude that the US housing sales niche is back ‘on track.’

Gold started the midweek session with a $1.90 per ounce gain, being quoted at $1,387.40 on the bid-side, as against a reading of 80.55 on the dollar index and a 35-cent rise in crude oil (to $90.17 per barrel). The yellow metal did receive one bit of possibly supportive news, in that the IMF announced that its disposal of 403.3 tonnes of bullion has now been completed.

About half of the IMF’s originally slated-for-sale tonnage was off-loaded on-market, as opposed to finding a home in one or another central bank, as had widely been anticipated. Physical buyers were showing a modicum of presence in silver this morning as well, as the white metal narrowed its opening loss of ten cents to but two pennies and traded at $29.35 per ounce.

Platinum and palladium continued to advance, with the former rising $6 to the $1,727.00 level and the latter gaining $4 to touch the $756.00 mark. Giving credence to previous views that stories floated earlier this year regarding the putative ‘drying-up’ of Russian palladium stockpiles were just…stories, Norilsk Nickel announced that it now does expect ‘some’ noble metal to come to market from those state inventories in 2011, and, that the ‘drying-up’ might now only occur in 2012. No worries there, there are some 2.2 million ounces of palladium on another ‘stockpile’ – that of the various ETPs focusing on the PGM niche.

Meanwhile, don’t look now, but there is a warm-colored metal that has gained 28% since the start of 2010 and it is…warming the hearts of investors. Not what you think, however. What is it, you say? It is…copper. Yes, a wonder metal that appears to have no limit in upside price potential, that is, if we are to listen to…assorted investment firm spokesmen. Why, just yesterday it was reported that a “single trader” owns some 80-90% of all the orange stuff being held at the LME Warehouse (one whose last name is possibly “Morgan” and not “Hunt”).

What’s next? Why, of course, the obligatory launch of a purely copper-oriented…ETF (which means, more of the same; the growing pattern of off-exchange hoarding of metals and other “stuff” by non-consumers of same). There are now nearly 1,000 ETFs of various kinds on the investment scene (and more on the way. A good thing? Hmmm. The answer depends on the person being queried. At the extreme end of the respondents’ spectrum are the critics who allege that ETFs may be used to manipulate market prices. Then, there are those who merely observe the facts, but do not draw much more encouraging conclusions:

John Bogle (Vanguard Group) minced no words when he characterized ETFs as “short-term speculation” and such vehicles have also been critiqued as instruments which decrease investment returns by zapping their holders with trading and management expenses.

That would only be half the problem, however. More significant is the variance between an ETF’s daily net asset value (NAV) and the daily closing price of the stuff it invests in. The Wall Street Journal reported that (during a turbulent market period in November of 2008) the deviation in the NAV-versus-closing-price in certain sparsely-traded ETFs turned into 5 and up to 10 percent gaps. Back in 2007, Mr. Bogle warned in his book “The Little Book of Common Sense Investing” that “while some broad-based ETFs are fine, the rest, are just disasters waiting to happen.

"Investors are performance-chasing" warned Mr. Bogle. Well, they still are (chasing) three years (and another 500 ETFs later) after that word of caution was issued. Thus far, no ‘accidents’ (unless, of course, you agree that ETFs were at least partially responsible for, or played some role in, the May “Flash Crash”).

And now, for something completely different (though also completely predictable); more regulation, coming to an investment theatre near you. Starting on January 1st, the average US equity brokerage firm will track (and report) the price an investor pays for a stock (or that share of gold ETF). No more ‘fuzzy math’ when it comes to reporting the gains on a share. Cost basis reported? Check. Sales proceeds reported? Check. Result? Send that check (for the cap gains taxes) to Uncle Sam. Can similar reports be far behind in the commodities’ niche? Probably not, and you may consider yourself as having been alerted.

Until tomorrow,

Jon Nadler