(Kitco News) - Precious metals and other commodity markets saw steep price declines in May but exchange-traded funds didn't accentuate the price drops, they only reflect the activity in the market, said the director for an exchange-traded fund.
Critics of ETFs, whether physically backed or ones that use derivatives, say these investment vehicles can influence the action in the markets. They suggested that ETFs push up prices higher than fundamentals allow, or by triggering sales when prices start to crumble, causing prices to fall further.
"I don't agree with that. We didn't see that pattern (of trading) in the market. If we saw massive liquidation of holdings perhaps… but that wasn't the pattern we saw. You see that in the futures market where there's more speculation going on there. The ETF investor is not setting the price discovery. That's being done in the futures and spot market," said William Rhind, managing director at ETF Securities.
Looking at the assets under management page on ETF Securities website, it shows a fairly stable number of shares outstanding across their precious metals ETF holdings. Prices of the ETF changes daily to reflect the price changes in the spot markets, but shares outstanding for their two biggest ETFs, ETFS Silver Trust ( SIVR ) and ETFS Gold Trust ( SGOL ) have held relatively unchanged this month at 17.9 million and 9.05 million, respectively.
Rhind said that reflects the long-term mentality of ETF buyers, versus the short-term view of futures market participants. "They're not day-traders trying to eke out (profits)," he said. "ETFs are fully paid so it lends itself to investors' longer time horizon."
Futures markets allow leverage, so a market participant only puts down a fraction of the total value of a contract.
Since the break earlier in May, precious metals prices have rebounded somewhat, but haven't recaptured their previous highs. Normally the summer months are quieter ones for metals, but this might not be the case this year. Rhind said with the European debt situation renewing worries of more fiscal troubles, gold and silver could see investor interest as safe-havens again.
The precious metals ETFs that ETF Securities offers are backed by physical metal which is why they reflect the market price. Demand for physical product, particularly for silver, has been very strong, as the U.S. Mint has reported coin sales of 2.9 million ounces - about 92 tons - already this month, surpassing full month sales in March and April.
Some investment managers of other funds have said they have had trouble sourcing silver for their products. However, Rhind said that hasn't been an issue for the firm. "We have had no issue sourcing silver to supply SIVR," he said. "You always have to be cautious regarding self-interest in the market."
ETF Securities has traditionally offered precious metals funds, among them gold, silver, platinum and palladium, but this year the firm is planning to expand its reach in the commodities sector. They have 25 filings with the Securities and Exchange Commission that are waiting approval, Rhind said.
By Debbie Carlson of Kitco News email@example.com