Deutsche Bank sent a shock wave through the commodities world last week by announcing the closure of its Powershares DB Crude Oil Double Long exchange-traded note (ETN). Should investors be nervous?
The ETN in question allowed investors to profit from movements in the oil price by buying a New York-listed share. As a 'double long' ETN, it aimed to deliver twice any upward move in the oil price. So an investor could achieve a leveraged bet on oil without getting involved directly in oil trading, or taking out a loan.
The bank hasn't revealed its exact reason for shutting the fund, but its press release hinted at a "regulatory event". As Morningstar's Scott Burns notes: "Deutsche Bank is a large player in the commodities sector and the CFTC [the US derivatives regulator] is breathing down everyone's necks."
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
There is growing speculation that the CFTC plans to limit the size of single commodity future positions (futures are contracts giving the holder the right to take delivery of a commodity at a set date).
It seems it is increasingly worried about the price volatility that such positions can generate. DB may have acted before any new rules, limiting the number of open contracts a single player can run and forcing funds to shrink or close. It's possible that this move will impact outside the US too. The CFTC's reach can extend beyond US borders to overseas products priced with reference to US instruments.
So what should investors do? DB has so far acted in isolation and it's important to note that its ETN holders should not suffer losses as a result of the liquidation.
So if you've invested in exchange-traded products that track commodity prices, there's no need to panic and sell up. But its ETN is unlikely to be the last such product to close.
Various pundits reckon that big funds such as US Natural Gas (UNG) and United States Oil (USO) could face restrictions on holdings and thus, potentially, closure too. As Matt Hougan, director of ETN analysis at IndexUniverse, told the FT: "It's the first shoe to drop, and won't be the last."
Looking ahead, the FT reckons that, in the short term, any move to limit positions in the futures market may push the price of physical assets such as gold higher.
That's because investors may seek to preserve long commodity positions by buying assets rather than financial contracts (such as futures subject to new trading limits). As gold is one of the easiest commodities to buy physically, it could be the main beneficiary of such a switch: another reason to buy it.
-
What happens if you can’t pay your tax bill, and what is "Time to Pay"?Millions are due to file their tax return this Friday as the self-assessment deadline closes. Though the nightmare is not over until you pay the taxman what you owe - or face a penalty. But what happens if you can't afford to pay HMRC your tax bill, and what is "Time to Pay"?
-
What does Rachel Reeves’s plan for growth mean for UK investors?Rachel Reeves says she is going “further and faster” to kickstart the UK economy, but investors are unlikely to be persuaded
