Is This The Commodity ETF For You?
The Dynamic Wealth Report
January 27, 2010
by Brian T Mikes, Editor
In 2006, more than 239 tons of platinum were bought and sold. 24 tons
were used in the electronics and chemical industries… almost 50 tons
were used in jewelry… and the remainder was used for automobile
emissions control.
Despite having a reputation as a precious metal, platinum is used in a
wide variety of industrial applications.
As the global economy improves, demand for platinum has only one
direction to head, and that’s up. Many investors are searching for ways
to participate in the movement of this commodity. The easiest way to
trade platinum (and most other commodities) is with an ETF. However,
anyone looking to make an investment needs to be careful.
As you’ll soon learn, not all Commodity ETFs are created equal.
Let me give you an example.
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Recently in my Commodity ETF Alert service, we put on a trade in
platinum. It was a great trade. We were watching the markets and noticed
inflation was starting to become a serious threat. Knowing hard assets
would jump in value, we established a position in the precious metal.
We bought shares of the iPath Dow Jones-UBS Platinum ETN (PGM).
Sure enough, as the end of the year approached, inflation started
becoming a concern… and precious metals prices started moving higher.
In
only seven weeks, we grabbed a quick 39% gain!
Like I said, it was a great trade.
But we assumed some risks. If you take a few minutes to read the
prospectus for this security, you’ll find some fascinating things…
One big risk is the value of the security.
The value of PGM might not match the value of the actual commodity. The
value of PGM is based on an index… which is linked to the price of the
index components… and those index components are tied to futures
contracts… which reflect the price of the physical commodity.
Needless to say, it’s a complex set-up and one where the value of an
investment might not actually match the value of the commodity on the
open market.
But that’s not the biggest concern.
A bigger concern is credit risk.
Remember, these ETNs are issued by Barclays Bank. If Barclays goes
under, or even if their credit rating gets downgraded, these ETNs might
lose value. In essence, the strength of this ETN rests on the shoulders
of Barclays.
Now, I have no reason to question the financial strength of Barclays…
but you just never know.
These investments are all at the mercy of the bank. In October of 2009,
Barclays decided to stop issuing new shares of PGM. The government put
in place new restrictions on the futures contracts being held by certain
organizations. It was an effort to control price volatility. As a
result, the price of PGM jumped.
Investors now have to pay-up for the privilege of owning the Platinum
ETN. Kind of ironic don’t you think?
That’s why I’ve been watching the most recent group of Commodity ETFs
launched by ETF Securities.
The new products focus on platinum and palladium commodities.
ETFS Physical Platinum Shares (PPLT) tracks the price of
platinum and ETFS Physical Palladium Shares (PALL) tracks the price of… you guessed
it… palladium. The prices on these ETFs are easy to figure out… one
share of the ETF represents one-tenth of an ounce of the respective
precious metal. Both funds charge a very low fee of 0.6%.
The funds buy the physical assets (no futures contracts here) and store
them in vaults. The vaults are controlled by JP Morgan and located
throughout Europe - primarily in the UK and Switzerland.
It eliminates the risk of futures prices not matching the actual
commodity price… and these ETFs eliminate entirely the credit risk from
the issuing bank. In my opinion, they are much better products.
Both platinum and palladium are used in a wide variety of products…
everything from electrical equipment, to medical devices, to catalytic
converters. As the economic recovery takes hold, demand for these
precious metals is sure to climb… and now we have a new and improved way
to invest!
If you’re thinking of investing in Commodity ETFs, take a look at PPLT
and PALL… I’m sure you’ll like what you see.
• Oil (Under $75 a barrel)
Oil supplies showed a loss of 3.9 million barrels last week. The
continued dollar strength has brought the price of crude down in recent
weeks. Currently, oil is trading at technical support at just under the
$75 level.
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