The ChoosaBroker Trading Academy

7.6. Precious and Non-Precious Metals

Unlike the more popular stocks and Forex, trading in metals is yet to witness similar levels of retail participation. And the blame can be squarely laid on the lack of sufficient information about the market. Metals offer some compelling trading opportunities, and should be a part of every model portfolio. In this lesson, we will explore the world of metals in detail, and look at the various trading assets on offer.

What is Metals Trading?

Metals can be broadly defined as elements, alloys or compounds that –

For hundreds of years, governments have been using metals as indicators of value. And as time passed, metals steadily crept in to almost every aspect of the modern, daily life. The major participants in the metals trading market include –

Trading in metals provides a few distinct advantages –

  • The market for metals is largely independent from other financial markets, making them great diversifying tools.
  • Numerous studies have shown that metals provide a strong shield against general price rise.
  • Due to the large number of metals in use, the market is heterogeneous, offering investors the luxury to choose from a wide variety of assets.

What are the Different Types of Metals?

Metals are generally grouped in to 2 broad categories:

  • Precious Metals – These are naturally occurring metallic elements that are relatively rare, and have high economic value. Examples include gold, silver, platinum and palladium. that are overvalued.
Base Metals – These are non-ferrous metals that have wide-ranging commercial and industrial applications. Examples include copper, aluminium, nickel, lead and zinc.
The uses and features of the most-traded precious and base metals are briefly explained below:
  1. Gold – Since the beginning of human civilization, gold has been viewed as a proxy for wealth. Although the metal is utilized in manufacturing some electronics parts, the overwhelming majority of gold’s demand is derived from its function as a store of value. The futures market offers traders a liquid and leveraged way to speculate on gold prices. The Commodity Exchange, Inc. (COMEX) is the hub of gold futures trading. Each futures contract is equal to 100 troy ounces of the metal, with prices being quoted in U.S. Dollars and Cents per troy ounce. Electronic trading on the exchange takes places from Sunday to Friday, 6:00 pm to 5:15 pm U.S. Eastern Standard Time, with a 45-minute halt each day between 5:15 pm and 6:00 pm.
  2. Silver – Silver is a valuable metal, with wide applications in a diverse array of sectors including jewellery, electronics, energy and medicine. Despite being a precious metal, silver has historically traded at a significant discount to the price of gold. The COMEX offers a futures contract on silver that represents 5,000 troy ounces of the metal. The contract can be traded from around the world on the Globex electronic platform.
  3. Platinum – Investors buy platinum for many of the same reasons they purchase gold. But platinum is even more rare than gold. Buyers of jewellery value platinum for its beautiful shiny appearance and resistance to tarnishing. The metal also enjoys strong demand from the automotive sector, where it is used in the manufacture of catalytic converters. The New York Mercantile Exchange (NYMEX) offers highly liquid platinum futures contracts. The platinum delivered under this contract is equal to 50 troy ounces of the metal, and is a minimum 99.95% pure. The futures contracts are available for electronic trading from Sunday to Friday, 6:00 pm to 5:15 pm U.S. Eastern Time, with a break each session between 5:15 pm and 6:00 pm.
  4. Copper – Copper can be easily stretched, moulded, and shaped. It is resistant to corrosion, and conducts electricity and heat efficiently. As a result, it is perfectly suited for a range of domestic and industrial uses including electrical wiring, roofing, plumbing, and industrial machinery. Since copper has many uses in a diverse array of industries, its price is considered a good barometer of the global economic strength. Copper futures on the London Metal Exchange come in lot sizes of 25 metric tonnes, with the price being quoted in U.S. Dollars per tonne. Trading is carried out from 7:00 am to 7:00 pm, Monday to Friday, Greenwich Mean Time.
  5. Aluminium – Aluminium is the most abundant element in the earth’s crust. It is lightweight, corrosion-resistant and heat-reflective, because of which, aluminium alloys are utilized in building aircrafts, washing machines, refrigerators, beverage cans and automobile hoods. High grade primary aluminium futures are amongst the most traded instruments on the London Metal Exchange. The lot size is 25 tonnes, and prices are quoted in U.S. Dollars per tonne.
  6. Nickel – Rarely used in its purest form, nickel is typically combined with other metals to produce alloys that provide both strength and ductility at high temperatures. Almost two-thirds of all nickel produced goes in to the making of stainless steel. Nickel alloys are also widely used in the manufacture of electronic equipments. The London Metal Exchange trades a futures contract on nickel that is 99.80% pure. Each contract represents 6 tonnes of nickel and is quoted in U.S. dollars.

What is Unique About Precious Metals Trading?

The range of investment products available to the retail investor is greater than ever. Investing is not an exact science, and financial advisers often disagree on what types of financial instruments to include in a portfolio. But when it comes to precious metals, those divergences tend to disappear because of some inherent advantages of this asset class.

  1. Hedge Against Inflation – Precious metals have historically offered excellent protection against inflation. Unlike paper money, which can be easily printed, one cannot make or print more gold or silver. Even at the highest inflation rates, precious metals are more than likely to retain their value, thereby reducing an investor’s credit risk.
  2. Stability of Value – For conservative investors, who are more concerned about the security of their investments rather than the prospects of earning profits, precious metals are ideal investment vehicles. More so during times of economic recession, when gold and silver see an increase in their safe haven appeal. You can buy and hold them without having to worry that their value will substantially decline overnight.
  3. Ideal Portfolio Diversification Candidate -The key to finding the right asset mix for your portfolio is finding investments that are not closely correlated to one another. Precious metals in general and gold in particular, have time and again demonstrated a negative correlation to stocks. Savvy investors tend to combine gold with stocks to reduce the volatility in their portfolios.

What is Unique About Base Metals Trading?

From a trading and investing standpoint, base metals have always been overshadowed by precious metals. But retail market interest is slowly yet steadily increasing. Here are three reasons to consider adding base metals to your investment portfolio.

  1. Robust Demand – Base metals are essential to many industries, and their demand is higher than ever. Their physical properties make them ideal raw materials for construction and manufacturing. Fluctuations in the price of base metals serve as superior indicators of global economic health. Anyone seeking to bet on the rapid rise of key consumers and emerging economies, China and India, should gain some exposure to these assets.
  2. Flattening Supply – On top of the skyrocketing demand is the problem of tightening supplies, which should likely cushion prices in the intermediate to long-term. Due to the high cost of extraction, the number of major base metal mines hasn’t significantly increased over the past couple of decades, while political instability, natural disasters, and labour disputes continue to interrupt production in the short-term.
  3. Diversification Play – The ever-increasing pace of demand, as well as the diminishing supplies, should help base metals retain and potentially grow their value in the long term, making them obvious choices for investors wanting to diversify their portfolios. While diversification can’t guarantee that you won’t incur a loss, it will help shield your investments from the ebb and flow of the market.

Final Thoughts

The key to achieving success in metals trading lies in conducting thorough due diligence before committing to a trade, especially if a complex trading instrument like futures contract is concerned. The volatility in the market can be harnessed to accumulate wealth; but when left unchecked, it can also lead to financial ruin.

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