"...Exchange-traded notes are about as criminal of a product as you could ever imagine. ETNs take in billions of dollars that are held by the issuing firm. The issuer then makes bets – not actual purchases of silver – on which direction the price of an underlying commodity will move. If $30 billion were to flow into commodity ETNs, not a single dime would actually be invested in commodities. If it were, prices would be affected, but instead, it flows through the backdoor and reduces overall interest in the physical markets.
Don't discount the role of fees in the commodity markets either. With annual fees on commodity mutual funds and ETFs going as high as 2% per year, the total amount of gold and silver held in these funds (if there is any at all) declines at a pace equal to its annual fee without any new investment.
Therefore, if there is $100 billion in commodity backed ETFs, ETNs, and mutual funds, as much as $2 billion a year is cashed out and sold on the marketplace. Without new blood (err, funds), the pool of commodities sees an influx.
And don't forget premiums! The ETF PHYS claims to own deliverable physical metals, but it recently traded with a premium of more than 13%. Thus, for each $1 invested, only $.88 went to the metals markets. Premiums on closed-end funds like PHYS for other commodities can run even higher. The infamous UNG ETF touched a 15% premium before heading lower as new shares were issued, however, even with the new buying power, natural gas continued to stagnate.
Clearly, commodities’ real values are suppressed by the hand of fancy financial vehicles."
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