Metals are used in manufacturing and consumer goods, including automobiles, electronics, jewellery, dental equipment and cookware. They are also critical in energy production, including power and battery storage.
Metals are often used as a hedge against inflation, especially during quantitative easing. They are a popular choice for traders looking to diversify their portfolio.
Understanding the Market
Precious metals are rare, high-valued commodities used in jewelry, manufacturing and investments. They include gold, silver and platinum.
Base metals, or industrial metals, are typically used as raw materials in the production of goods and products. They are less valuable and rare than precious metals and include copper, aluminium and nickel.
As capital markets restrict commodity traders’ access to financing, they are seeking new strategies to scale their business. For example, in energy transition commodities such as sustainable aviation fuel, customer centricity will drive more demand for custom origination and risk management capabilities – potentially forcing integrated players to accelerate the build-out of these skills. The same trend could also lead to acquisition opportunities as large traders seek out smaller, niche traders with differentiated capabilities. This is already underway in the copper market, where merchant traders have engaged junior miners on long-term origination contracts linked to prefinancing. The result is a more fragmented and specialized market for commodity trading that may challenge the profitability of some players.
Understanding the Commodity
Commodities are traded on exchanges just like stocks and bonds, but they differ in that they represent physical goods. The price of a commodity is determined by the current supply and demand. Traditionally, commodity buyers include business users who need commodities to run their operations, farmers and miners looking for a guaranteed long-term price for their products, and speculators who are trying to profit from a rise in prices.
Investors can purchase commodities directly from a supplier (for example, precious metals) or buy into companies involved in the commodity through futures contracts. The latter is more common for larger companies that want to diversify their portfolios. In either case, investing in commodities is typically reserved for more sophisticated investors who are willing to hold physical assets and take on higher levels of risk. Investors should also be aware that commodity prices can rise and fall rapidly. As a result, it can be difficult to lock in a specific price for a commodity that they want to purchase.
Understanding the Industry
Metals are a commodity that is traded around the world. They are used to make cars, electronics, factory equipment, jewellery and cookware. They are also important components in battery production and power generation.
The four main precious metals are gold, silver, platinum and palladium. These are viewed as a store of wealth and have a long history of being traded as currency. Gold is especially volatile and has a high correlation with other markets, particularly currencies.
Base metals include copper, nickel, zinc and lead. These are less volatile than precious metals and are utilised in industrial applications such as electrical wiring and manufacturing alloys like brass (a mixture of copper and tin). Base metals can also be found in decorative finishes, with the Statue of Liberty getting its green hue from oxidised copper. Traders can trade these metals on the London Metals Exchange as well as through the Chicago Mercantile Exchange. Many of the contracts available through these exchanges are physically delivered but traders can also choose financial futures and options.
Understanding the Risk
The value of precious metals like gold and silver can go up or down depending on the bullion market price, supply of specific items and overall demand. Also, as with any investment, there is risk of loss.
Mining operations are often located far from consumer markets, and supply chains can be complex. These factors make managing geopolitical risks an important part of a miner’s strategy.
A metals trader might buy or sell futures contracts to achieve a variety of goals. These might include hedging financial risk, securing the necessary materials to manufacture products or speculating on future prices. Traders can choose from a broad spectrum of live metals, including both precious and base metals such as copper, aluminium and zinc. Moreover, they can get daily volume and open interest reports from the Commodity Futures Trading Commission (CFTC), a regulator for the US commodities markets. The CFTC also publishes educational materials and market news on metals trading.