The new trend for exchange traded funds backed by physical commodities held in storage could fuel a enormous commodities price bubble according to trader warnings directed at the U.K.’s Financial Services Authority (FSA).
Several metal traders and experts have written to the City watchdog claiming that licensing the so-called physically-backed exchange-traded funds (ETFs), which banks including JP Morgan, Goldman Sachs and Deutsche Bank have said they plan to launch shortly, may amount to “approving the next financial bubble”. Traders’ concerns are based on the ETFs model that will require the investments to be backed by physical metals, such as copper, lead, aluminium and nickel, rather than paper assets offered by futures contracts.
Physical storage, rather the representation of ownership on paper alone, would turn out to be an expensive experiment for paranoid investors:
Metals experts warn that investors will face expensive shipping, storage and disposal costs that are likely to take the lion’s share of the investment gains.
They also claim ETFs could distort commodities markets around the world. One trader told The Daily Telegraph: “Metals like copper are in intense demand. By buying futures contracts, investors have never impacted the physical cost or supply of copper. But allowing investors to hoard physical supplies is the equivalent of allowing investors to sit on warehouses of wheat while Tesco is short of bread.”
Here’s a shocking statistic from the warnings — if planned physical-backed copper funds become fully subscribed, then their demand alone would equal copper equivalent to half of the London Metals Exchange ‘s (LME) total warehouse stocks.