Once again, surging demand from China has created some advantageous opportunities for investors. And this time, I'm not talking about the gold market...
According to the Institutional Investor, another group of metals (not-so-precious metals) is gaining market momentum because of an increase in global demand and a decrease in global supply. Industrial metals, valued for their practical uses in manufacturing and other everyday matters, is stealing the spotlight from gold and the other three precious metals – silver, palladium, and platinum.
Copper is especially alluring as the International Copper Study Group (ICSG) recently (in April) announced its projection for copper's global shortage: about 240,000 metric tons over the next 365 days.
?Additionally, copper is even more appealing as it is now positioned to become the first physical industrial metal to enter the realm of ETF markets in the United States. J.P. Morgan Commodity ETF Services was the first to actually file for a physical copper ETF back in 2010. If the SEC approves the proposal, J.P. Morgan's service will also be the first to hit the market, perhaps as early as June.
Although the idea is not completely new, since ETFs already exist for the precious metals, it is a pretty radical move.
“This is a big move,” says Morningstar ETF analyst Abe Bailin in Chicago. “It’s not just another frivolous, ‘me too’ type of product. For the first time in the U.S. market, investors are going to be able to get exposure to physical copper, and that’s a ground-breaking thing,” he says, noting that it won’t be just accredited investors, but “Joe Six-Pack” as well.
ETF Securities – based in London – has also filed for ETFs with several physical industrial metals: copper, lead, zinc, tin, nickel, and aluminum. The organization already industrial metals ETFs in the U.K., launched in late 2010 and early 2011.
As these happenings are finally spilling out the general public, John Hyland – chief investment officer at the U.S. Commodity Funds of Alameda, California – the majority of those people are focused on copper and its connection the the global GDP:
“If I told you that China’s GDP numbers had surprised on the upside, the Chinese might need lead for batteries, but most people trade copper,” he says. “Also, on the supply side, copper tends to be pretty constrained. You don’t have to worry about someone magically finding a new mine and doubling production” since copper is produced by just a few countries, notably Chile, he says.
Some critics fear that the news ETFs will result in hoarding. “Demand from China is very strong, with Chinese imports up more than 30 percent year over year, over the last five months,” says Commodities Researcher, Wiktor Bielski. There has been a significant drawdown of available copper inventory, so to use some of the remaining metal to back an investment product is just an inappropriate use in my view,” he says.
From the sounds of things, he may be right. In the past year alone, copper theft has been steadily increasing in schools, neighborhood homes, and even in churches as it's quickly gaining value due to the surging global demand. Hoarding is a very plausible scenario. Nonetheless, industrial metals ETFs will help these emerging markets grow and provide great opportunities for investors if it does come to fruition.
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