Wednesday, December 8, 2010

Financialization of Copper

An excerpt from this CNBC article:

Just a few short years ago, the now-monstrous GLD ETF was but a curiosity in the gold market, an obscure financial instrument in an old-fashioned asset class. It has since become the largest private holder of bullion in the world, buying $30 million worth of gold a day and "wagging the dog" in terms of price action. It has been estimated that GLD alone represents hundreds of dollars per ounce of the spot price of gold.

My question is: What exactly is the benefit of all these commodity ETFs anyway? It's hard to see how this is useful innovation. They appear to be another set of vehicles that helps a sector that has historically made up 2.5-3.0% of GDP become more like 6.5-7.5% of GDP without adding much value.

...in 1965 the financial sector of the economy took up 3% of the GDP pie. The 1960s were probably the high water mark (or one of them) of America’s capitalism. They clearly had adequate financial tools. Innovation could obviously have occurred continuously in all aspects of finance, without necessarily moving its share of the economy materially over 3%. Yet by 2007 the share had risen to 7.5% of GDP! - Jeremy Grantham in his 3Q09 Letter

And Volcker said the following in late 2009.

"I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence," said Mr Volcker...

He said that financial services in the United States had increased its share of value added from 2 per cent to 6.5 per cent, but he asked: "Is that a reflection of your financial innovation, or just a reflection of what you’re paid?" - Paul Volcker

It's one thing to create financial vehicles that end up inflating the value of a mostly useless metal like gold.

I think it is an entirely different matter altogether to distort the prices of something as useful as copper.

Some copper facts:

More than 40 billion pounds is used globally each year with building construction, electrical/electronic products, transportation equipment, and Industrial machinery/equipment consuming the bulk of it.

Over 400 lbs of copper is used in an average single-family home.

9,000 pounds of the total weight of a Boeing 747-200 jet plane is copper. Included in that weight is 632,000 feet of copper wire.

A typical, diesel-electric railroad locomotive uses about 11,000 pounds of copper.

Triton-class nuclear submarine uses about 200,000 pounds of copper.

Since the early 1960s, over 5 million miles of copper plumbing tube has been installed in U.S. buildings. That's equivalent to a coil wrapping around the Earth more than 200 times. The current installation rate exceeds a billion feet per year.

Kinda useful stuff.

Traditional banks need to get back to being a utility that focuses on the role of intelligently lending money and being a trusted holder of deposits.

Basically, get back to banking.

Investment banks need to be, first and foremost, a trusted facilitator when it comes to capital formation and allocation for businesses (from very large to very small).

Basically, put a whole lot less energy into their many casino-like activities. Today, providing access to capital seems a sideshow compared to what they primarily do.

Adam

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