Commodity ETFs Influencing Underlying Price? (GLD, SLV, USO)

Roger Nusbaum submits: There is an interesting article up at ETFzone.com about demand for the Gold ETF (GLD) moving the price of the commodity (tail wagging the dog so to speak). For evidence, the article cites that demand for things like jewelry and industrial use is down but the price is up a lot. The assertion made could be correct but my initial reaction is to disagree.

I do believe investor demand has been a catalyst to lift the price, but the total assets in the two ETFs add up to about $8 billion. For the analysis to be complete we would need to know what the growth in open interest for gold commodity contracts has been. I imagine the leverage offered in that market has caused more growth in futures than in ETFs. If anyone has this info please leave a comment.

I would think the Silver ETF would be more likely to be the tail that wags the dog. Tom Szabo of Silver Axis explains this much better than I could. The short and dirty is that the silver market has different dynamics, because much of it gets destroyed as it is consumed.

A reader left a comment about the "tracking" problem that United States Oil Fund (USO) has in staying with the price of crude. The earlier Brent Oil Security (OILB.L) has a similar issue, in that the actual price of Brent is different than the price of the fund.

The issue boils down to whether you as an investor can live with the flaws. Jimmy Rogers made an interesting comment the other day on Fox about oil stocks vs. oil the commodity. Some of the integrated oil companies will face problems with declining reserves in the coming years. Some of these companies' share prices will suffer as a result. He said own oil, not the companies.

Certainly the logic makes sense. This means that if oil stocks stop being good proxies for oil, we will face having to pick from something like USO or a commodity contract. Chances are I would go with USO, but fortunately no one needs to decide this today.