HardAssetsInvestor

Written by Lara Crigger  |

October 08, 2009

Gary Gordon: How Regulation Will Force ETFs To Evolve

Details

The president of Pacific Park Financial shares his thoughts on the shifting landscape for commodities ETFs.

• The regulatory ‘rock and a hard place’
• A push toward physical ETFs?
• Why he likes GCC—but not DJP

 

It seems like every other day, regulators are coming up with new plans on how to increase the controls over the commodities markets: Rep. Barney Frank's proposal on limiting derivatives; CFTC chairman Gary Gensler's plans to regulate the over-the-counter market; the CFTC's proposal to close the "Enron loophole" in natural gas ... sounds like Washington's caught a case of regulation fever.

And the impact on commodities exchange-traded products could be staggering, says Gary Gordon, president of Pacific Park Financial. With more than 19 years' experience in finance, Mr. Gordon is a vocal and trusted advocate for investors: Not only does he host San Diego's "In the Money with Gary Gordon" radio show, he's also the editor of the ETF-centric blog and clearinghouse, ETF Expert.

Recently, HAI Associate Editor Lara Crigger chatted with Mr. Gordon about his thoughts on all this proposed regulation, including how position limits are like Prohibition, why position limits might lead to more physical ETFs and which ETFs he's avoiding until the storm blows over.

Lara Crigger, associate editor, HardAssetsInvestor.com (Crigger): So what do you think about the CFTC's proposed position limits for energy futures?

Gary Gordon, president, Pacific Park Financial (Gordon): Like most people, I still want to see what's going to shake out. I'd say I have a negative view, but I'm also aware that they're between a rock and a hard place here. But whatever they eventually push through is probably not going to help. That's the sad part of it; one way or another, there will be ramifications.

Obviously, their intentions are to lessen volatility. When oil goes from $70 up to $150, and then down to $35 and back up to $70, you're not just talking about the dollar losing or gaining ground, and you're not just talking about supply and demand; you're talking about people speculating.

Crigger: Do you find a kernel of truth then in what they're saying about speculators driving up energy prices?

Gordon: Well, how we define "speculators" is also an issue. You and me, we're speculators too. If we think oil's going to $150, we want to get some money in there, too.

But the answer is yes: Obviously, you don't have to be a mathematician to realize that, based on the emerging market growth and developed market growth that has happened throughout the past seven-eight years, $70 to $150 for oil doesn't make any sense. Or $150 to $30. You can say the price of the dollar is affecting it, and that's true, and there's a war premium; but the reality is there wasn't 100% demand in six months.

But the problem is, they probably can't come up with a solution that would work. It's like prohibition of alcohol. Back then, they were obviously trying to stamp something out—although in that case, it was completely; here, we're not trying to stop people from completely investing—but it didn't stop people from getting alcohol. It probably increased the price or the volatility of the price, because there wasn't an open market for it. And people went to alternative places to get it.

Crigger: So if limits are put in place here, you think investors will seek out alternatives, like the over- the-counter market or overseas exchanges?

Gordon: The answer is a definite yes. There isn't even a question about that. When people want something bad enough, they're going to get it.

Overseas markets—the Asian exchanges, in particular—are just going to throw open their doors and say, "Hey, come over here!" So it's unlikely that outright restrictions or certain limits will stop it. I don't necessarily believe it's going to be this mass exodus, because I think it depends on what those regulations ultimately look like. Hedge funds would probably go elsewhere anyway, but for adviser and retail money, if that money wants to get exposure, they'd probably be fine.

But it all depends on how it comes through. Say you have position limits—does that mean when you hit a limit, you can just open up a second, third or fourth fund, so that when you add it up, it's like having 10 mini-UNGs, rather than one big UNG [U.S. Natural Gas ETF]? Or does it mean that your company's done? And if your company's done, can another company open up in your place? Or does it mean that nobody can register for new products anymore, because so much has been acquired in the U.S. markets? That's why it's so hard to talk about this. We're sitting here trying to figure out what they're going to do, but who really knows?