Metal Trading Essentials

Jun 25, 2020 11:01 AM ET
Metal Trading Essentials

Introduction

There are a plethora of metal commodities that offer individuals a multitude of trading options. Among them, some metals such as iron and aluminum are abundantly present in the earth's crust. Others, such as gold and palladium, are rare. However, one thing that is common in the production of all types of metals is the enormous human resources and energy associated with it.

Metals are predominantly classified into two main groups, even though several others exist. Industrial and commercial applications use base metals such as lead and zinc. There are also precious metals that are naturally occurring and rare metallic elements. A wide variety of sectors use metals in some capacity, such as in construction, manufacturing as well as power and storage industries.

Metals such as gold, silver, and copper consistently feature in the list of ten most traded commodities. Metals such as aluminum, copper, nickel, ferrous scrap, and lead along with precious metals such as gold and silver are among the most traded commodities by a group.

Precious Metals

Metal Trading

Precious metals include all the metallic elements which are naturally occurring and hold high economic value. Besides being industrial elements, precious metals are a viable vehicle for investment as well. Gold and silver, along with Platinum and Palladium are the primary precious metals in the market.

  • Gold: Gold is a reliable and safe tool for saving money from inflation for a long term investor. Traders can earn substantial profits from gold volatility as it is sensitive to any risk occurring in financial markets. Investors can purchase coins and bullions, but trading physical gold is not cost-effective due to the spread between buying and selling price. Futures, ETFs, and mining companies' shares allow making gold investments an efficient way.

  • Silver: Silver has always traded at less of a price than gold throughout history yet present similar investing opportunities. Used extensively in both jewelry and electronics, traders can also collect silver in the form of bars and coins. Aberdeen Standard Physical Silver Shares ETF (SIVR) is an example of a liquid silver ETF.

  • Platinum: Platinum belongs to a part of a group of metals known as PGMs. Catalytic converters in automobiles use platinum as a core material. They are also available in jewelry form. They possess many of the traits that gold and silver possess, which makes it a viable investment.

  • Palladium: Palladium also belongs to the Platinum Group Metals. It has quite a demand because it is one of the manufacturing elements of dental equipment, catalytic converters, semiconductors, and electronics parts. Traders also heat the prices with the demand, far dwarfing the markets for other metals in the PGM group such as osmium, iridium, etc.

Industrial Metals

Also known as base metals, industrial metals are common metals that undergo tarnishing, oxidizing, and corrosion. They are widely present in industrial and commercial applications such as manufacturing and construction. Lead, copper, zinc, and nickel are prime examples of industrial metals.

  • Copper: Copper has excellent conductivity properties, making it ideal for use in the manufacture of electrical equipment components, such as wiring.

  • Aluminum: The transportation industry uses aluminum in various capacities, such as manufacturing cars, bicycles, and even aircraft. Additionally, it has corrosion-resistant properties, which makes it a prime material used by the food and beverage sectors, such as in cans, packaging, and storage foils.

  • Lead: Lead is the softest metal in this category. It is also ductile and malleable. It is the main component in the process of battery manufacturing.

  • Zinc: Zinc is present in alloys, which is a combination of multiple metallic elements. Zinc and copper together produce brass. Industries such as the automobile sector and shipbuilding sectors use zinc for their electrical components and related components.

There are several different types of firms that engage actively in the trading of base metals and for varied reasons. While some firms trade metals as investment assets, others use it to hedge a physical price exposure caused by the company's involvement in the metal's supply chain.

Rare Earth Metals

Rare Earth Metals or Rare Earth Elements are a set of 17 chemical elements. It consists of Scandium, Yttrium, and fifteen lanthanides from the periodic table. These elements consist of Promethium (Pm), Samarium (Sm), Scandium (Sc), Terbium (Tb), Thulium (Tm), Ytterbium (Yb), Yttrium (Y), Cerium (Ce), Dysprosium (Dy), Erbium (Er), Europium (Eu), Gadolinium (Gd), Holmium (Ho), Lanthanum (La), Lutetium (Lu), Neodymium (Nd) and Praseodymium (Pr)

Rare earth metals are used across almost 200 products. These include high tech consumer products, such as computers, vehicles, televisions, etc. Rare earth metals aren't used in excessive quantities in the manufacture of these products but rather form the core component without which the whole product doesn't work. However, these elements are almost always necessary for the device to function properly.

Starting in 2008, China started increasing its share in the production of rare-earth metals. In 2011, 97 percent of the world's production of rare earth was from China. The United States and China have put rare earth materials into the spotlight.

Because of its usage in multiple emerging sectors and industries, investors have growing concerns regarding China, believing that they could restrict exports to the United States to gain the upper hand in the trade tensions. 

When it comes to the world's reserves of rare-earth metals, however, China accounts for 37%, followed by Brazil at 18% and Russia at 15%. The United States only accounts for a mere 1% per the same source. 

How To Trade Metals?

  • Metal ETFs: Metal-based exchange-traded funds offer traders exposure to the prices of base and industrial metals, as well as precious ones. They offer ETFs which are physically-backed, or futures based. They include ETFs for aluminum, copper lead, and nickel.

Futures for precious metals provide traders and investors with a mechanism for managing exposure in the market. NYMEX, COMEX, and others offer the most metal futures contracts, providing price discovery and transparency. With almost 22 million ounces traded daily, COMEX is a classical gold futures contract. NYMEX offers a platinum contract for 50 ounces of platinum, as well as a palladium contract.

Examples of Metal ETFs Include:

  • Invesco DB Base Metals Fund

  • iPath Series B Bloomberg Copper Sub-index Total Return ETN

  • The United States Copper Index Fund

Company Stocks and Mutual Funds: Traders can go for shares of precious metals mining companies. Growing metal prices increase their margin exponentially, which leverages stock performance and volatility as well. There are many precious metal companies worldwide, with some of the majors in the US, Australia, Canada, and South Africa. Precious metal funds carry more volatility compared to average equity funds. Fidelity Select Gold Portfolio Fund, Gabelli Gold Fund, and Wells Fargo Advantage Precious Metals Fund are great examples.

Conclusion

Investing in metals provides investors and traders with a variety of opportunities. While gold always held an essential position in the minds of investors throughout history, newer elements such as palladium and industrial metals attract the attention they deserve. There are various trading vehicles available for trading, including futures, options, ETFs, and stocks.  


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