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February 04, 2010 |
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New Precious-Metals ETFs Face Risks |
(Dow Jones) With exchange-traded funds that own the precious metals platinum and
palladium becoming bona-fide hits, investors may start to wonder if
these funds could prompt the kind of regulatory concerns about
speculators that have plagued energy funds.
In fact, the metals funds have a major design advantage over
the types of funds that have come in for scrutiny, but investors
shouldn't totally discount the risk.
On the market for only about three weeks, the ETFS Physical
Platinum Shares and ETFS Physical Palladium Shares have
already garnered more than $500 million, with expectations about the
demand they represent helping to drive platinum and palladium prices to
12-month highs last month.
Prices have slipped a bit in the past two weeks but, if ETFs
appear to be making the metals more expensive for companies that use
them to make goods such as catalytic converters, they could draw the
eye of regulators. That's what happened last summer when worries about
energy prices prompted oil and natural gas ETFs to stop issuing new
shares, distorting prices for investors that traded them.
To be sure, metals markets aren't as politically volatile as
energy prices, which many Americans see every day at the gasoline pump.
However, the Commodity Futures Trading Commission, the agency which has
taken the lead on targeting energy speculators, has suggested it may
look into metals in the future. Moreover, one of the forerunners of the
platinum ETF, an exchange-traded note issued by Barclays Capital that
tracks a platinum-futures index, "temporarily" suspended issuing new
shares in October and has never resumed.
A key reason that curbs on the platinum and palladium funds
seem unlikely is that, unlike energy funds, they own actual amounts of
physical metals, not futures contracts tied to the metals. This puts
them outside the jurisdiction of the CFTC, the regulator that has taken
the lead on curbing commodity speculation. (The Barclays Capital ETN is
a debt security and doesn't technically own futures or metal, but most
investors believe Barclays uses futures markets to offset risks
associated with the product.)
Gold and silver ETFs, like the platinum and palladium funds,
own actual metals and have been allowed to grow toweringly large. The
gold fund has $40 billion. Still, because the platinum and palladium
markets are much smaller than the one for gold, regulators could be
more likely to take action.
If regulators did decide that the new funds needed to be
reined in, they would have at least one conceivable avenue: As with
other commodity ETFs, the platinum and palladium funds must
periodically ask the Securities and Exchange Commission for permission
to issue new shares, a step both funds have already taken because of
their popularity.
In theory, the SEC could withhold this approval if it grew
concerned about the funds' operations. That seems unlikely at present
but it can't entirely be ruled out.
"It's not the SEC's role to care about people speculating in
commodities," William Rhind, head of sales for ETFS Marketing LLC,
which created the platinum and palladium funds, said in a recent
interview. Added Rhind: "Touch wood."
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Discussion
Should all advisors fall under one self-regulatory organization and could that happen on Mary Schapiro’s watch?
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