Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19
Gold Price Gann Angle Update - 10th July 19
Crude Oil Prices and the 2019 Hurricane Season - 10th July 19
Can Gold Recover from Friday’s Strong Payrolls Hit? - 10th July 19
Netflix’s Worst Nightmare Has Come True - 10th July 19
LIMITLESS - Improving Cognitive Function and Fighting Brain Ageing Right Now! - 10th July 19
US Dollar Strength Will Drive Markets Higher - 10th July 19
Government-Pumped Student Loan Bubble Sets Up Next Financial Crisis - 10th July 19
Stock Market SPX 3000 Dream is Pushed Away: Pullback of 5-10% is Coming - 10th July 19
July 2019 GBPUSD Market Update and Outlook - 10th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Washington Targets Commodity ETF's

Commodities / Exchange Traded Funds Sep 12, 2009 - 10:13 AM GMT

By: Ron_Rowland

Commodities

Best Financial Markets Analysis Article When it comes to investing in commodities, the people I know have two opposite emotions — either obsessed or terrified.

I can see why. The commodity markets — contracts representing tangible goods like gold, oil, grains, etc — are known for sharp reversals and wild volatility. The potential profit can be enormous if your forecast is correct. If you’re wrong … let’s just say the results aren’t pretty.


Today I’m going to tell you about some of the best new investment instruments created in my lifetime — and how their very existence is under attack from powerful vested interests.

Commodity ETFs Revolutionize Investing!

Until recently, commodity investing was mostly restricted to professional traders, large institutions and a few intrepid individuals. This began to change with the introduction of commodity-based ETFs.

The idea wasn’t really so complicated: Start a fund whose price is based on a commodity market or a commodity-related index. Simple in concept, but difficult in reality mainly because of legal restrictions, these took a long time to resolve even as stock-based ETFs thrived.

SPDR Gold Shares (GLD) was an immediate success.
SPDR Gold Shares (GLD) was an immediate success.

Finally, the first commodity ETF launched in 2004. SPDR Gold Shares (GLD) was an immediate success. With the path now open, a flurry of similar funds hit the market in the next few years, tracking all kinds of commodities.

It didn’t hurt that this period was accompanied by a huge bull market in all kinds of natural resources. Crude oil went from less than $40 to more than $140 per barrel, gold climbed from around $400 an ounce to over $1,000, and corn jumped from $2 all the way up to $6!

With investors clamoring to get into booming commodities but afraid to trade highly-leveraged futures and options, these ETFs came at the perfect time.

Many were actually offered under a new structure called exchange-traded notes, or ETNs, that look a lot like ETFs but have some important differences. (See my February 6, 2009 Money and Markets column about the unique risks of ETNs.)

Three Kinds of Commodity Funds

Commodity ETFs and ETNs can be broken down into three groups:

1. Broad-based: These track an index that includes many different commodity markets. These are very useful to long-term investors who want to allocate a small portfolio slice to commodities and don’t care so much about following particular markets. Some examples are …

  • iShares S&P GSCI Commodity Index (GSG)
  • PowerShares DB Commodity Index (DBC)
  • GreenHaven Continuous Commodity (GCC)

2. Commodity Sectors: This type of fund tries to cover a particular category of commodities, like energy, agriculture, metals, etc. These are naturally more volatile than the broad-based funds, but have the potential to move much higher if the sector takes off. This group includes funds like …

  • PowerShares DB Energy (DBE)
  • PowerShares DB Agriculture (DBA)
  • Elements Rogers ICI Metals ETN (RJZ)

3. Specific Commodities: Funds in this category track the price of one particular market, like GLD that I mentioned above. These are considered very speculative. Here are some you might have heard about …

  • United States 12-Month Oil Fund (USL)
  • iPath DJ AIG Sugar ETN (SGG)
  • iPath DJ AIG Copper ETN (JJC)

As with stock ETFs, some commodity ETFs and ETNs are designed to deliver leveraged and/or inverse returns. These features can be useful but also bring extra volatility and risks. They should be used very cautiously.

Regulatory Chaos Threatens to Eliminate Innovation

A bureaucratic turf war is threatening the markets.
A bureaucratic turf war is threatening the markets.

I’m sure you’ll agree that having these alternatives available is a good thing for investors, even if commodities aren’t for you. So you might be surprised to learn that regulators are well on the way to eliminating your ability to invest in commodities with ETFs/ETNs.

Why? Several reasons, but for the most part it is a bureaucratic turf war. The Commodity Futures Trading Commission (CFTC) has long had a monopoly on the regulation of these markets. They (and their allies in Congress) would like to keep it that way.

ETFs and ETNs fall under the jurisdiction of the Securities and Exchange Commission (SEC). The CFTC can control some aspects of their activity, but on most issues the SEC is in charge.

Recent actions by the CFTC are causing some commodity ETF and ETN sponsors to reconsider whether this business has a long-term future. By enforcing “position limits” against the funds, the CFTC can effectively cap their size — which can make them less profitable for the sponsors and less liquid for investors.

The boogeyman is “speculation,” which some people think got out of hand when commodity prices shot so high in 2007-2008. I think they’re barking up the wrong tree. Financial markets are all about speculation! It’s not a bad thing, as long as the process is fair to all sides.

The struggle over these issues is ongoing. No one knows when — or how — it will be resolved. Some sponsors aren’t waiting. Just last week, Deutsche Bank announced it would liquidate its PowerShares DB Crude Oil Double Long ETN (DXO) as of yesterday (September 9). Investors who still own DXO today will receive cash equal to the net asset value as the shares have stopped trading.

Financial markets are all about speculation.
Financial markets are all about speculation.

Other funds like United States Natural Gas Fund (UNG) have stopped issuing new shares, allowing their share price to deviate from the actual value. This means new buyers are paying more than they should.

Sounds like a mess, doesn’t it? You are exactly right. I am saddened to see these innovative new funds threatened for no good reason. I want small investors to have choices, and I don’t want the commodity markets to be dominated by a small number of powerful institutions.

If you’re thinking about buying a commodity-related ETF or ETN, I highly suggest you do some homework first. Make sure that you’ll be able to stay in the fund you pick long enough to achieve your objectives.

I wish I could be more specific, but keep in mind we’re dealing with the U.S. government! It’s very hard to predict what they will do. Investors deserve better — so cross your fingers that the regulators come to their senses soon.

Best wishes,

Ron

P.S. I speak with Sean Brodrick every week about commodities, commodity ETFs, and commodity-related investments. He runs a service called Red-Hot Commodity ETFs. If you invest in commodity ETFs, or are considering it, then Sean and Red-Hot Commodity ETFs can help you stay on top of new regulatory developments and point you toward commodity-related ETFs that are not subject to CFTC scrutiny.

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

Money and Markets Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules