Brown: The Financialization of Copper

According to reports in the Telegraph, last week a mystery buyer stepped into the LME pits with a massive $1.5 billion purchase of copper- equal to "between 50pc and 80pc of the 350,000 tonnes in reserves".

Many on the LME suspect that this mystery buyer is actually JPMorgan and that the bank is positioning itself ahead of their copper ETF launch. This pushed up the metal's price to its highest level since the Lehman Brothers meltdown in September of 2008 (over $8700 per tonne).

And this kind of action could be just the beginning...

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.

Chiquicamata Coppermine, Atacama Desert, Chile
Charles Bowman | Robert Harding World Imagery | Getty Images
Chiquicamata Coppermine, Atacama Desert, Chile

And now, there are some big wagers that the same type of financialization is coming to the copper market.

Right now, there are two publicly-traded copper ETFs but they do not hold the metal itself, just the common stocks of copper miners like Freeport McMoRan. Neither of these funds has been able to attract even $50 million in assets under management and, frankly, the sector just isn't very wide. There is also a UBS exchange traded note (ETN) product that seeks to reflect the total return of high grade copper futures...but this is still just paper (and subject to the credit risk of UBS).

There are, however, two physically-backed copper ETFs in registration with the SEC - one from Barclays iShares, the other from JPMorgan. Speculators are betting that the advent of these funds will mean big buying in the copper market as the managers seek to take on enough exposure to meet shareholder demand.

To be certain, copper is not trading at 28-month highs based purely on these coming ETFs, it has its own bull story as one of the most essential industrial metals on earth. China's urbanization, burgeoning economic recovery in the developed world and hiccups in the supply chain caused by Chilean miner strikes are just a few of the factors to consider here. But should one or both of these physically-backed copper funds capture the imagination of the investing public, we're talking about a whole new ballgame in an already volatile market.

JPMorgan's copper fund will be called the J.P. Morgan Physical Copper Shares ETFand be based on Comex Grade A Copper. It will warehouse its physical copper in the US just like the GLD fund does. Barclays is building its own product, the iShares Copper Trust, around the London Metals Exchange and it too will store the underlying metal at locations around the country.

Gold and silver prices have been heavily influenced by the financial players who swing around blocks of their respective ETF shares every day on the stock market. With two physically-backed ETFs from very large banks arriving any day now, copper traders may want to brace themselves for what's to come.

Joshua Brown is a New York City-based financial advisor at Fusion Analytics and the author of The Reformed Broker blog. The opinions he expresses are his own and do not constitute an invitation to buy or sell any securities.