Precious Metals & Industrial Metals: The Commodity.com Guide

Why Are Metals Important?

Metals are elements, compounds or alloys that are typically hard when present in a solid state. They are usually characterized by their shiny appearance, electrical and thermal conductivity, malleability, ductility and fusibility.

More than 75% of the elements in the periodic table are metals. Although we typically think of metals as present in the finished goods we use, their origin begins beneath the earth’s surface.

Some elements such as aluminum and iron are abundant in the earth’s crust, while others such as palladium and gold are extremely rare. However, producing even the most common elements requires enormous energy and manpower.

The physical properties of metals make them ideal raw materials for building and manufacturing many essential items we use in our daily lives.

The construction sector uses metals to build bridges, homes, office buildings, railroads and airports.

The manufacturing sector uses metals to make automobiles, electronics, factory equipment, jewelry, cookware, dental equipment, protective shielding, cutlery and many other items.

Metals also play a role in the power and storage industries. They are important components in battery production and even play a vital role in the creation of nuclear energy.

What Are the Different Types of Metals?

Gold via Umicore on Wikimedia

Metals are typically grouped into one of two categories:

Precious metals – rare, naturally occurring metallic elements
Base Metals – metals widely used in commercial and industrial applications

Precious Metals

Precious Metals are rare, naturally occurring metallic elements with high economic value. They are unusual in that they are both industrial elements and investments.

Manufacturers use these metals to make electronic components, jewelry, dental equipment and catalytic converters among other things. Investors, on the other hand, collect coins and bars made out of precious metals.

This second use – as investments – makes precious metals the objects of intense speculation in commodity markets. Precious metals traders see these commodities as a form of money that holds its value better than printed paper money.

Skeptics, however, argue that precious metals are simply rocks with little utility beyond their limited industrial uses. Ironically, the high premium placed on precious metals by traders makes them too expensive and impractical for most industrial applications. The precious metals with active commodities markets include the following:

1. Gold
2. Silver
3. Platinum
4. Palladium

Gold

Gold is the main precious metal utilized by speculators as an investment vehicle. Although manufacturers use the metal in some electronics parts, the vast majority of gold demand derives from jewelry manufacturers and traders. Many consumers see gold jewelry as a form of investment. Read our Guide to Gold here.

Silver

Manufacturers also use silver in both electronics and jewelry, while traders collect the metal in the form of coins or bars. Silver has historically traded at a fraction of the price of gold. Some traders track and trade the spread between gold and silver prices. Read our Silver Trading Guide here.

Platinum

Part of a group of six metals known as platinum group metals (PGMs), platinum is used to make jewelry and catalytic converters for cars. Investors purchase platinum for many of the same reasons they buy gold and silver. See our Platinum Guide for more information.

Palladium

Palladium is a member of the PGMs and is used to make catalytic converters, dental equipment and electronics parts. Palladium also receives demand from traders. Learn about trading in our Palladium Guide.

The remaining PGMs – rhodium, ruthenium, osmium and iridium – have much smaller markets.

Precious Metals

Base Metal – Copper via Pixabay

Base Metals

Base metals are used in a whole range of industrial and commercial applications including construction and manufacturing. Their widespread use in everyday items makes them essential commodities in global markets. While the mining industry narrowly defines base metals as non-ferrous metals excluding precious metals, the broader definition used by US Customs and Borders Protection includes the following popular commodities:

1. Aluminum
2. Copper
3. Iron
4. Lead
5. Molybdenum
6. Nickel
7. Steel
8. Tin
9. Zinc

Main Uses of Metals

Commodity	Primary Uses	Contract Size	Futures Exchange
Aluminum	Aerospace, cans, automobiles, construction, electrical wiring, appliances, foil and packaging.	25 metric tons	COMEX
Copper	Electrical wiring, plumbing fixtures, transportation equipment, electric equipment, electronics, consumer products and industrial equipment.	25,000 pounds	COMEX
Iron Ore	About 98% of iron goes toward steel production.	500 dry metric tons	NYMEX
Lead	Batteries, protective shielding, ammunition and industrial sheets.	25 metric tons	COMEX
Molybdenum	Molybdenum is primarily an alloying agent with steel. The metal is also used in the production of petroleum, electronics, fertilizers and lubricants.	6 metric tons	LME
Nickel	Most nickel is used in stainless steel manufacturing. Other uses include electronics, plating, catalysts and rechargeable batteries.	6 metric tons	LME
Steel	Construction and infrastructure projects, mechanical equipment and automobiles.	20 short tons	NYMEX
Tin	Tin is used as a coating metal and as an alloy to strengthen other metals.	5 metric tons	LME
Zinc	Zinc is principally used to galvanize steel and as an alloy to strengthen other metals.	25 metric tons	COMEX

A specialty metal not included in the above list is lithium. This unique, super light metal is now a mainstay in energy-efficient battery production. Although there is no lithium futures market, traders can gain exposure to this metal through the shares of companies that mine it.

Chemetall Foote Lithium Operation via Wikimedia

What are the Main Global Metals Trends?

Several long-term trends could create investment opportunities in metals over the next two decades:

1. Chinese Demand
2. Technological Innovation
3. Environmental Regulations
4. Population Growth
5. BRICS Countries

Chinese Demand

As with most commodities, the Chinese economy plays an enormous role in determining metals prices. China still requires massive infrastructure to industrialize and urbanize its economy. As China builds this infrastructure, metals of all kinds will play a key role.

Chaotianmen Yangtze River Bridge in Chongqing City China

Market participants should monitor how China manages its resource needs and economy in the years ahead.

Here are three of three of the many areas to consider:

1. More cars, factories and metal equipment in the country mean more opportunities to recycle. This development has the potential to siphon away demand from mining.
2. Restrictions on mining activity (see Environmental Regulations section below) have the potential to limit supplies and raise prices.
3. Monetary policy from the People’s Bank of China can have an important effect on metals demand. Stimulating measures can stoke demand for metals, while tighter monetary policies can depress demand.

Technological Innovation

The mining industry has faced tremendous financial challenges in the recent past. Many mining companies simply can’t extract and process minerals at a cost that allows them to make a profit. While depressed prices for some metals may be one reason, a bigger problem is the high cost of mining.

One way mining companies are confronting this challenge is through investments in technology. Automated excavation equipment, electric vehicles, X-ray diffraction and sensor-based sorting of minerals are some of the new technologies that could transform the industry into a more profitable sector for traders.

BYD Q Hybrid Vehicle in China via Wikimedia

Environmental Regulations

The mining industry faces intense global scrutiny for the environmental footprint it leaves. Many mining practices contribute to contaminated groundwater, loss of biodiversity, land erosion, destruction of crops and other problems.

Most countries are now taking these problems very seriously. In China, for example, crackdowns on environmental pollution have caused the shutdowns of more than half of the lead and zinc mines in parts of the country.

Environmental Pollution Nantong China via Publicdomainpictures.net

However, industries and consumers still need metals, and the mining industry is beginning to create cleaner ways of doing business. Renewable energy sources for mining, less invasive surface mining technologies and advanced water reclamation efforts are a few of the ways the industry is tackling environmental challenges. Investors could profit from investing in these trends.

Population Growth

Increases in the world population and demographic shifts could create investment opportunities in metals.

The World Economic Forum estimates that the number of people living in cities could reach 6.4 billion by 2050. This urbanization trend should create enormous demand for metals as cities build their infrastructure. However, the location of mines is likely to be far away from cities and, in many cases, in poor underdeveloped regions of the world.

This dichotomy could produce huge supply/demand imbalances in metals markets. Solving these logistical problems could be a profitable venture.

BRICS Countries

The five BRICS countries – Brazil, Russia, India, China and South Africa – are becoming increasingly dominant players in the metals and mining industry. The total market value of mining assets in these countries exceeds $1 trillion.

Recently China’s state-owned gold mining company formed an investment fund with a Russian-controlled investment entity. If cooperative alliances such as this one become the norm in the future, then a small handful of entities could wield tremendous power over metals markets. On the other hand, if the BRICS countries continue to compete with one another, then the current market structure would remain intact.

BRICS Leaders at the 2016 G20 Summit in China via Narindra Modi on Wikimedia

In other words, the future development of the mining industry in the BRICs countries could have a huge effect on metals markets and pricing.

Top Metals Producing Countries

Commodity	Flag	Top Producing Country	Thousand Metric Tons
#1 Gold		China	455
#2 Silver		Mexico	5,600
#3 Platinum		South Africa	120,000
#4 Palladium		Russia	82,000
#5 Aluminum		China	31,000
#6 Copper		Chile	5,500
#7 Iron Ore		Australia	825
#8 Lead		China	2,400
#9 Molybdenum		China	90,000
#10 Nickel		Philippines	500,000
#11 Steel		China	685
#12 Tin		China	100,000
#13 Zinc		China	4,500
#14 Lithium		Australia	14,300

Traders can follow the metals markets by monitoring the performance of some of the main indices that track the sector.

The following metals indices are a good barometer for investment demand in the sector since they measure the performance of metals futures:

Top Precious Metal Indices

What Are The Top Metals Investment Resources?

Investors can find additional information on investing in metals and the mining sector from the following sources:

US Geological Survey (USGS)

This scientific agency of the US government has a National Minerals Information Center that compiles statistics and information on the worldwide supply of, demand for, and flow of minerals and materials essential to the US economy. USGS also provides forecasts and analyses of trends in the markets for dozens of mineral commodities.

Mining.com

This website has up-to-date market pricing and news on both the precious and base metals sectors. The site also features analyses and forecasts of metals prices by leading industry experts and educational material on the industry.

Industry Trade Groups

Industry group websites are a great way to learn about the economics, news and fundamental drivers of individual metals prices. These organizations publish timely content on issues that impact their sectors (e.g., trade, mining regulations, environmental initiatives, etc.) Copper Development Association Inc.

Here’s a small sample of metals trade organizations:

Copper.org

World Gold Council

Steel Manufacturers Association

The Aluminum Association

The London Metals Exchange (LME)

The LME is the most important global exchange for industrial metals trading. The exchange publishes comprehensive market data, news and educational materials on base metals markets. The LME’s detailed warehouse stock reports for base metals offer market participants valuable information about metal supplies and are often the source of price movements in markets.

CME Group

This American financial company operates futures and options exchanges including the New York Mercantile Exchange (NYMEX) and the Commodity Exchange, Inc. (COMEX), an entity that merged with NYMEX. The CME publishes daily volume and open interest reports for precious and base metals commodities, educational courses on metals trading, trading tools, brokerage resources and other information about metals markets and trading.

Trading Metals

CFDs

One way to invest in metals is through the use of a contract for difference (CFD) derivative instrument. CFDs allow traders to speculate on the price of metals. The value of a CFD is the difference between the price of metals at the time of purchase and the current price.

Some regulated brokers worldwide offer CFDs on metals. Customers deposit funds with the broker, which serve as margin. The advantage of CFDs is that trader can have exposure to metal prices without having to purchase shares, ETFs, futures or options.

• About the Author

Lawrence Pines Author

Lawrence Pines is a Princeton University graduate with more than 25 years of experience as an equity and foreign exchange options trader for multinational banks and proprietary trading groups. Mr. Pines has traded on the NYSE, CBOE and Pacific Stock Exchange. In 2011, Mr. Pines started his own consulting firm through which he advises law firms and investment professionals on issues related to trading, and derivatives. Lawrence has served as an expert witness in a number of high profile trials in US Federal and international courts.

email

larry@commodity.com