USCF’s Hyland: Metal ETFs Can't Hoard

December 11, 2012

CIO for United States Commodity Funds weighs in on SEC study associated with proposal for a physically backed copper fund.

The JP Morgan XF Physical Copper Trust—a J.P. Morgan fund that is currently in registration at the Securities and Exchange Commission—would be the first ETF to be backed by physical copper, much like the SPDR Gold Fund (NYSEArca: GLD) holds gold bullion. The SEC may rule on whether the fund can go to market as soon as Thursday, or the review could be extended again. IndexUniverse’s Drew Voros caught up with John Hyland, chief investment officer for U.S. Commodity Funds, to discuss the regulatory review, and more specifically, an SEC study that examined the impact of metal ETFs on prices.

IU: Do you agree with the SEC’s recent study that says ETFs do not move metal prices?

John Hyland: I agree with their conclusion, but I think there is a flaw in the presumption that led to putting together the study. The presumption they are making is that if GLD owns $60 billion worth of gold, that somehow that gold is not on the marketplace and that it’s somehow being hoarded; whereas, if a central bank bought that same $60 billion worth of gold, somehow it is in the market.

But we know that the exact opposite is true, that GLD’s gold is absolutely available to the marketplace. Any large player can buy that physical gold right out of GLD and take delivery of it, if they so choose, which they cannot do if the same $60 billion or $70 billion was owned by the Central Bank of Singapore.

I would argue that the only gold in London that is fully available to the marketplace is the gold held by the ETFs, because they're the only ones whose mandate requires that they sell the gold to you in exchange for you providing them the shares.

IU: They're creating, they're redeeming and you see the flows. Some days there's $250 million flowing out of GLD. And that’s $250 million worth of gold flowing out, right?

Hyland: All that’s really happening is that in these vaults that are operated by HSBC or J.P. Morgan or UBS or whomever, you’ve got all these stacks of gold that never really go anywhere. Although this isn't actually how they do it, I like to visualize that every stack of gold has a little Post-it note on it saying, “Today this gold belongs to the Central Bank of Singapore.” And then the next day, the tag gets replaced and says, “Today this gold belongs to GLD.” The gold actually doesn’t go anywhere. Just the little Post-its move around.

But only GLD and the other physical metal ETFs are the only real participants in these markets that are bound every day to buy or sell gold. They're the only physical players in those markets that have to provide access to their stockpile to anybody who shows up with 100,000 shares worth.

But if you get into platinum, palladium or silver, where you have larger percentages of the activity there involving the auto industry or other industries, you could make the argument. That’s a little different. But even then, it doesn’t make sense. Because, once again, SLV [iShares Silver Trust] has to sell the silver, the physical silver, to whoever wants it. They're going to have to pay the then-going price. But SLV cannot hoard silver. Anybody can have it who wants to cobble together an order.

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