A law firm that represents major copper producers and traders has sent a letter to the Securities and Exchange Commission opposing a physically-backed copper ETF proposed by JP Morgan (NYSE: JPM).
Vandenberg & Feliu LLP said the planned JP Morgan ETF would be backed by physical copper that must meet the London Metal Exchange requirements for copper available for immediate delivery.
“JMP’s offering initially calls for the immediate removal from the market of as much as 61,800 metric tons of such copper, or the withdrawal of more than 30% of the copper available for immediate delivery worldwide,” the letter said. “JPM’s offering will therefore result in a substantial artificially-induced rise in near-term copper prices on the LME, which will severely disrupt the world market for the trading of such copper by, among other things, simulating the effects of an artificial squeeze or corner being financed by unsuspecting investors in JPM’s ETF.”
The lawyers represent Southwire, one of the largest copper users in the United States, and Red Kite, a major metals hedge fund and physical trader, according to a Reuters report.
They argued the JP Morgan ETF would artificially boost copper prices.
“However, like all bubbles, as investor demand for this product wanes, as it inevitably will, the bubble will burst, leaving in its wake a glut of physical copper that the JPM Trust will be forced to dump on the market, causing prices to plummet, and leaving in its wake unsuspecting investors who will have lost the value of their investment,” Vandenberg & Feliu wrote.
“In short, this proposed rule-change will allow the trading of an ETF whose sole purpose is to remove from the market a physical metal in short supply that, unlike other ETFs backed by physical metals that have been successfully offered for sale in the United States, is used only in manufacturing and for no other purpose,” according to the letter sent to the SEC, which was dated May 9. “Adopting this rule change will therefore undermine the integrity of the very markets that the NYSE and the SEC are supposed to protect, grossly and artificially inflate prices for an industrial commodity already in short supply and, as a consequence, wreak havoc on the U.S. and global economy.”
There are copper exchange traded products currently on the market, but they are designed to track futures contracts rather than hold the physical metal. One example is iPath Copper ETN (NYSEArca: JJC). [Getting Physical with Copper ETFs]
BlackRock and ETF Securities have also filed to list copper-backed ETFs. [JP Morgan Readies First Physical Copper ETF]
The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.