Founder of $125 Billion Gold ETP Market Stymied on Copper
Graham Tuckwell, who created a $125 billion market in exchange-traded gold in less than a decade, is struggling to convince regulators and investors he can do the same for industrial metals.
More than a year after he sought permission to start an exchange-traded product backed by copper held in warehouses, the U.S. Securities and Exchange Commission has yet to approve the plan. Investors in a similar London-listed fund from Tuckwell’s ETF Securities Ltd. accumulated just $13.2 million of copper since December 2010, equal to about 46 minutes of global demand, data compiled by Bloomberg show.
While Tuckwell created a class of securities now backed by 2,405 metric tons of gold, exceeding the reserves of all but four central banks, he’s had less success with industrial metals. The new products are opposed by some consumers concerned they will cause shortages of materials used in everything from cables to cars, while the U.S. Commodity Futures Trading Commission is trying to limit speculation.
“As you move away from the typical investment products to things that would be viewed to be more usable commodities, regulators become more concerned,” said Deborah Fuhr, a co- founder of London-based research group ETFGI LLP and the former head of ETF research at BlackRock Inc. “Graham really was the guy who brought the first exchange-traded gold product to the markets. As you move into other commodities, though, they tend not to be seen as an investment by most investors.”
The drive to list U.S. ETPs backed by copper comes at a time of tumbling prices. The LMEX gauge of six metals declined 18 percent since this year’s peak on Feb. 9 as the Standard & Poor’s GSCI Spot Index of 24 commodities retreated 18 percent. Commodities fell 2.5 percent to 560.82 as of 2:02 p.m. today and will be in a bear market if the index closes at that level.
Investor demand also may be stifled by the warehouse storage costs associated with industrial metals. ETF Securities’ London-listed copper ETP has annual management and insurance expenses of 0.81 percent and a rental fee of almost $150 a ton per year, data on the company’s website show. That compares with an annual expense of 0.39 percent for its gold-backed ETP.
“The challenge is straightforward,” said Dave Nadig, the director of research at IndexUniverse LLC, a San Francisco-based ETF analysis group. “I can hold a million dollars worth of gold in my hand, but I would have to stack aluminum up as high as my house to get a million dollars.”
ETF’s plan for copper is one of seven products it submitted to U.S. regulators for approval in February 2011, including aluminum, tin, nickel, zinc, lead and a basket of base metals.
Plans to create U.S. ETPs backed by industrial metals are opposed by some consumers. Vandenberg & Feliu LLP, representing an unidentified group of U.S. fabricators and a merchant company, wrote to the SEC (COPA) in May to object to JPMorgan Chase & Co.’s plan for a copper-backed ETP.
The product will cause prices to rise, “which will severely disrupt the world market for the trading of such copper,” the New York-based law firm said in the letter. The group includes Southwire Co., a wire and cable manufacturer based in Carrollton, Georgia, according to an SEC document dated May 14.
Florence Harmon, an SEC spokeswoman, declined to comment.
The market for ETPs exploded in the past decade by offering investors access to almost all asset classes in a security that could be traded like a stock and with fees that undercut most mutual and hedge funds. While one gold contract on the Comex exchange in New York costs more than $160,000, ETF Securities’ ETP can be bought for about $160 a share. There were 4,650 ETFs and ETPs with assets of $1.62 trillion by the end of May, up from 105 holding $79 billion in 2000, according to ETFGI.
ETF Securities already has London-listed ETPs backed by aluminum, lead, zinc, tin and nickel stored in warehouses. Holdings across the products have so far lagged behind gold, with none of their market capitalizations exceeding $3.2 million. They will grow as more investors discover them and financial advisers recommend them, Tuckwell said.
“The intermediaries, I think, is where the missing piece is,” Tuckwell said in interviews in March and on June 19. “You get this conflict between mutual funds or the asset managers and the ETFs, because we’re basically eating their lunch. The money’s flowing toward us, and will naturally flow toward us because it’s cheaper, more efficient and more transparent.”
Tuckwell, 55, has overcome objections before. The Canberra, Australia-born entrepreneur was undeterred in 2002 when the Australian Gold Council rejected his plan for gold ETPs modeled on existing securities backed by cases of wine. Investors were trading particular vintages and he proposed treating gold bars in vaults like bottles in cellars.
Tuckwell, who holds degrees in economics and law from the Australian National University, brought the plan instead to the producer-funded World Gold Council in London, which approved the proposal. The first gold ETPs were listed in 2003 in the U.K. and Australia, with each share representing a 10th of an ounce. In an interview in June 2003 in Lisbon, he predicted investors would hold 50 tons in ETPs within a year. They now own 48 times that amount.
The introduction of the ETPs came three years into the longest gold bull market in at least nine decades, with bullion rising every year since 2001 and increasing sixfold over the period. Commodity prices also exploded as producers failed to keep up with demand, attracting $429 billion of investment by April in ETPs, index-linked funds and medium-term notes, according to Barclays Plc.
ETF Securities, based in Jersey, Channel Islands, went on to create ETPs in everything from agriculture to energy to currencies, working with HSBC Holdings Plc, Royal Dutch Shell Plc, UBS AG and Morgan Stanley. It has about $25.8 billion of assets under management, according to data on its website.
Tuckwell’s career has taken him from working as a mergers and acquisitions banker for Credit Suisse First Boston in Australia to executive director for strategy and acquisitions at Normandy Mining, a gold producer later bought by Newmont Mining Corp. The father of four also worked as head of mining in the Asia-Pacific region for Salomon Brothers and founded Investor Resources Ltd., a consultant to commodity companies.
The success of Tuckwell’s gold ETFs spawned similar products from Deutsche Bank AG, State Street Global Advisors and Credit Suisse Group AG. Now, JPMorgan and BlackRock, both based in New York, are also seeking U.S. listing for ETPs backed by industrial metals.
U.S. commodity ETPs grew to $117.6 billion under management at the end of March, from $14.5 billion in 2006, according to the ETF Industry Association, a Philadelphia-based trade group. Commodities make up 9.7 percent of all U.S.-listed ETF assets, almost triple the 3.3 percent in 2006.
The process “has been a bit frustrating,” said Tuckwell, who in his spare time enjoys math puzzles and golf. “If, as we believe, the ETF industry is a massive growth industry for the next few decades relative to the other asset-management businesses, then fair enough, it should be understood by regulators and investors.”
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