Despite a spirited defence from the mining industry, JPMorgan has received permission from the SEC to issue an exchange-traded fund that tracks the price of physical copper. A look at the history of gold prices and gold stocks shows why copper miners have reason to worry.
In ancient times - say, 2003 - there were few ways for the average investor to benefit from a rising gold price, other than by purchasing gold mining stocks. This changed with the release of GLD, the SPDR Gold Trust ETF, in November, 2004.
The ETF allowed the average investor to speculate on the price of gold without taking on the operating risk, or hedging risk (many gold miners sold future production at a set price through futures or other contracts) of owning a mining stock.
The result? Both the U.S. and Canadian gold mining subindexes, which up to that point had loosely followed the bullion price, were left in the dust. Assets in the U.S. gold ETF rose from virtually zero to the current $73.6 billion (U.S.), diverting assets that would otherwise have been invested in gold mining stocks.
There are many reasons to believe the same phenomenon will occur in the copper sector. With the ETF, investors won't have to concern themselves with operating costs for specific companies, which, in some cases, not only include the investment necessary to build a mine, but also highways and other expensive infrastructure.
ETF investors can also sidestep political risk, as miners are forced to extend into politically unstable regions like the Democratic Republic of the Congo to maintain production growth.
The new dynamic will be interesting to watch. It is possible that the new ETF will drive metals prices sharply higher solely because it makes speculating on the copper price more convenient.
Longer term, this would increase profits for miners.
In the short term, however, the precedent of the gold sector strongly suggests that the new ETF is not good news for copper miners and will divert investor assets away from their stocks.
© 2007 The Globe and Mail. All rights reserved.
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