Lord Copper has done well to draw attention to the groundswell of interest in exchange-traded funds (ETFs) in commodities, and particularly base metals. It’s easy enough to see why the financial whizz-kids are interested in metals – they’re going up and the prospects are for them to go on going up. This is an ideal background for persuading your clients to go long of metals.
When the average seriously-rich individual or corporate punter probably knows relatively little about the metals themselves and their markets, anything which makes the proposed punt look more solid is bound to be welcome.
And telling them you are going to operate through a regulated and cleared futures market gives just the sheen of respectability that is needed.
People’s memories for bad news are much longer than for good, and you don’t have to talk about speculating on commodities for long before somebody mutters “Frozen orange juice”.
They may then go on to mutter about sardine can trading, though to the best of my knowledge there never actually was a major scam in sardines in tins.
So the ability to demonstrate that the metal you’re persuading your client to go long of is really there, tangibly and reported on daily by the LME, is helpful.
You can also prove it conforms to a specification for the most liquidly-traded type of metal. This is a great improvement on some earlier attempts to whip up interest in some minor metals which could be said to be linked to defence requirements or new technologies like mobile phones and nuclear power stations.
So far so good for the promoters.
But Lord Copper is bang-on when he queries the impact a new body of speculative trading through ETFs would have on the markets themselves and their underlying metals.
But here I would like to broaden the discussion beyond Lord Copper’s favourite metal, for nearly all the little we have heard about impending metal ETF action so far relates to aluminium.
Aluminium is a very different animal from copper – for a start it doesn’t have the scrap factor that is such a major element in copper.
As I explained in my book “Corner! A century of metal market manipulation”, virtually every historical attempt to corner or manipulate the copper market was undone to a greater or less extent by the scrap factor.
Even today, when we have recycling of UBCs and some billet discards, it is broadly true to say that scrap does not circulate through the primary aluminium market the way it does in copper.
That is why it may be too soon to focus on the prospect of producers selling their output into an ETF instead of into the market as the main potential worry about ETFs in all metals.
Perhaps a more fruitful parallel can be drawn with one of the biggest “off-market-but-in-the-market” stocks in history, namely the tin buffer stock run by the International Tin Agreement between 1956 and 1985.
It is certainly one of the most glaring illustrations of Lord Copper’s fears for a stock being accumulated to the point that its eventual return on to the market is catastrophically destabilising. For younger readers, the final collapse of the Tin Agreement saw a real price emerge that was barely half the level that had been ruling on the LME up to that point.
But again, we must keep the detail in mind. The Tin Agreement had its moments along the way – what is now remembered as “the Adnan-Bueno affair” being the most notable.
More important is that throughout its life the Buffer stock was held off the market and out of sight, in that holdings were not reported until the figures were three months old. This is as far removed as you can get from an ETF promoter looking to take advantage of Sword.
The more you look into this question, the more two things become clear.
One is that we are not yet far enough down the road to make any really reliable predictions.
The other is that, when we do get a picture of the way ETFs are going and the market is reacting in one metal, that may well tell us very little about how this issue is going, or will go, in another metal.
Trevor Tarring is the former chairman of Metal Bulletin.
