Commodity ETFs – Is the Government Manipulating The Commodity Markets?
Every day I read several newspapers, online blogs, websites, and magazines… as well as what seems like thousands of e-mails. I’m a voracious reader and I’m always looking for new ideas.
In the last few days, I stumbled across some really interesting news. What I learned was nothing short of astounding. Proof the US government is manipulating markets.
It makes me hot under the collar.
I always assumed the government influenced the markets in some way… I just didn’t know how blatant it could be. It really makes me mad.
What am I talking about?
I’m talking about the CFTC plans to limit holdings by investors.
That’s right. The government is going to tell investors how much of a particular commodity they’re allowed to own. Seems downright un-American don’t you think? Here’s the bigger problem. It’s going to hurt your ability to make money in the markets.
First off, let me say this. I’m a tried and true “laissez-faire” type of guy. As my high school economics teacher explained so many years ago, laissez-faire loosely translated means, “Hands Off!” It’s a policy I wish our politicians would learn to adopt.
I really hate how the kneejerk reaction by government is to regulate.
So, why is the CFTC trying to limit trading on the commodity market?
Because prices went up! Seriously. Oil prices had a spectacular rise and fall last year (as did a lot of other commodities). Because of that rise and fall, the government wants to regulate even more.
Now, I’m all for fair markets… but what the government wants to do is limit your ability to make money. What they want to do is limit trading in certain commodities by large funds. All it’s going to do is make it more expensive and add risk for you to trade in the commodity markets.
Here’s why.
One of the easiest ways you can trade the commodity market is through Exchange Traded Funds (ETFs). The fund goes out and buys a commodity (or the futures contracts) and holds them. You can then buy a piece of the ETF. If the value of the commodity goes up… your ETF goes up in value. If the value of the commodity goes down… well you get the idea.
What’s special about these ETFs?
Well for one, you can buy them in a regular stock brokerage account. They trade just like stocks. Their expenses are reasonable. And, most importantly, as an investor you get to participate in the upside of commodity trading without all the risk and complexity of commodity futures.
No need to set up new commodity trading accounts. No need to learn a bunch of new trading lingo. No need to take on extra risk with margin and leverage.
In other words, commodity ETFs let you trade commodities without risking your home or retirement funds.
But that all might change.
What the CFTC wants to do is limit how much of a commodity funds can hold. The very ETFs you trade could be subject to these restrictions.
That means it could become more costly for us to trade the ETFs.
Here’s why.
The ETF markets might dry up and cause spreads to widen. Plans for new commodity ETFs might be dropped, meaning less competition. The funds might also begin charging extra fees for compliance. We might even see price premiums added to the ETFs… meaning new investors would be forced to pay more than the fund is worth.
But, worst of all, these commodity funds might disappear all together.
You could lose… a great way to diversify your holdings… an effective way to hedge against inflation… and a simple way to profit in the commodity markets. All because the government wants to manipulate the markets.
The next time someone suggests more government regulation is the answer, feel free to send them this article. And politely suggest they look at all the consequences of excessive government manipulation and regulation.
Category: Commodities
