Paper Chase

The SEC’s recent comments on a proposed copper- backed ETF shows the depth, or lack thereof, of regulatory analysis being applied to commodity based financial products. The staff of the SEC found that “Fund flows into ETF’s don’t lead to changes in underlying metals prices”.  They also went on to state that their analysis ” found no evidence of a statistical relationship between LME inventory levels and LME settlement prices for copper”.  The SEC analysis was performed on five ETF markets involving: Copper, Gold, Silver, Platinum and Palladium.  What was interesting was that they did not give the time frame that was used for purposes of correlation, but what was most interesting was that their basic analysis defies reality.  Perhaps a discussion with some actual metal producers might have led to some different conclusions.

Neville Nicolau, CEO of Anglo Platinum stated in 2011 that ” The investment sector is now firmly established as a key source for demand for the PGM’s with platinum investment making up 10% and palladium 15% of the 2010 demand respectively”.  A discussion with UC Rusal CEO Oleg Deripaska would have shed some light on this issue as well.  Mr. Deripaska wrote of the influence of investment flows into metals markets in an FT OP-ED piece in which he said ” Capital inflows driven by index investors and hedge funds in particular, have distorted the supply/demand equilibrium, sending the wrong signal for the players in the market”.

When the largest producers of metal are publicly commenting on the spillover affect that financial flows have on physical prices, one might think the SEC might take notice and dig deeper.  A more in-depth analysis however, would not serve the purposes of those seeking to bring more of these commodity- backed financial products to market.

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