Don’t Blame Platinium, Palladium ETFs
The successful launch of the ETFS Physical Platinum Shares(PPLT) and ETFS Physical Palladium Shares(PALL) ETFs on Jan. 8 once again proved the efficiency of ETFs in opening up segments of the market to everyday investors.
Now, the price of platinum in the U.S. — once influenced by a small group of manufacturers, futures traders and miners — will reflect the demand of American investors, who have flocked to ETFs for inexpensive, transparent exposure.
Criticism of PPLT and PALL, the first U.S. ETFs to offer physically backed exposure to platinum and palladium, is both misguided as well as misdirected.
According to a Jan. 19 Wall Street Journal article, “Platinum and palladium futures rose sharply Tuesday, settling at their highest levels since July, boosted by demand from newly launched exchange-traded funds that are luring investors, but could be a headache for consumers of the physical metals.”
While platinum and palladium futures markets will undoubtedly reflect the increased demand for the physical metal, PALL and PPLT can hardly be held responsible for manipulating the futures market and “luring” investors.
Like the massive SPDR Gold Shares(GLD) and iShares Silver(SLV) ETFs, PALL and PPLT are backed by physical assets, meaning that the funds have to buy and store the metals to meet investor demand for shares.
Physically backed ETFs like PALL and PPLT are a world apart from the futures-backed funds that have recently drawn the ire of the Commodities Futures Trading Commission (CFTC). It is futures-backed funds, such as the United States Natural Gas(UNG), that truly have the potential to manipulate markets and lure investors into vehicles inappropriate for their strategies.
Prior to physically backed PALL and PPLT, investors looking to access platinum through an exchange-traded strategy had to settle for the futures-backed iPath Dow Jones Platinum ETN(PGM). This exchange traded note’s latest brush with futures regulation is a good illustration of how investors can be misled by some commodity funds.
On Oct. 15, 2009, Barclays (BCS) announced that it was suspending further sales and issuance of PGM. New limitations on futures positions capped the size of PGM, halted new share creation, and effectively turned PGM into a closed-end fund.
This kind of disruption in trading taxes investors, causing dislocation between a fund’s underlying value and market value. Ideally, an ETF’s or ETN’s trading value should be as close as possible. The proximity of these values is useful in judging a fund’s liquidity, as well as the general effectiveness of its strategy.
The capping of PGM’s share creation is currently taxing investors with a premium. As trading commenced today, investors wanting to buy PGM had to pay $39.50 for a share worth $38.68.
PALL and PPLT offer straight-forward, transparent access to physical platinum and palladium. Rather than having to buy and safeguard the physical metal, investors can instead scoop up shares of PALL and PPLT.
ETFs have once again made part of the market more accessible to U.S. investors. It is up to them to safeguard this privilege.
