Commodity Futures: Metals

Updated: Sep 21, 2020

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Metal futures have a long and illustrious history of attracting everyone from institutional investors such as banks to private individual traders. These contracts’ widespread popularity is a result of their usefulness in protecting buyers and sellers against price and volatility risk, as well as for investment opportunities.

There are unique factors to evaluate trades in metals futures market. These metals are used as investments and for manufacturing in industrial applications. The metals market is divided into precious metals (gold, silver, platinum, palladium), base metals (copper, aluminium, cobalt, nickel, zinc, tin, lead etc.), ferrous metals (iron ore, steel etc.) and others (uranium).

The supply and demand of metal futures are impacted by speculators as well as industrial manufacturers who use these metals for different purposes. For some metals like gold and silver, there is also strong demand as Index Funds, Exchange Traded Funds (ETFs) and other investment funds, as investor appetite for precious metals increase.

Gold is used as speculative investment, in manufacture of jewellery and in electronics industry. It is a unique metal, used as currency and for storage as assets to hedge against inflation. Gold is the most popular investment and trade option of all precious metals on the markets. The value of gold is the exact same all over the world after currency conversion.

Silver, second in popularity after gold in the precious metal futures markets, is considered a good investment because of its versatility and many industry uses. Since the earliest times in antiquity, currencies used in different ancient civilizations were stabilized using silver bullion as assets. Silver futures can be used as a hedging tool for both producers and consumers of silver alike.

Platinum has multiple functions in both as jewellery and in industry, and has earned its increased importance in the futures markets over the past few years

Palladium is one of most most versatile metal investment, and steadily growing in importance in the futures markets.

In the modern world, iron alloys, such as steel, cast iron and special steels are the most common industrial metals, because of mechanical properties and low cost.

For base metals, the major applications of copper are electrical wiring, roofing and plumbing, and industrial machinery. Copper is used mostly as a pure metal and into such alloys as brass and bronze.

The most widely used non-ferrous metal, aluminium and its alloys are vital to the aerospace industry and important in transportation and building industries, such as building facades and window frames.

Lead has extensive use in construction, plumbing, batteries, solders, pewters, fusible alloys, white paints, leaded gasoline, and radiation shielding.

Nickel and its compounds are valuable chiefly in alloys (stainless steel), alloy steels, foundries, plating and other applications such as in batteries, pigments and metal surface treatments.

Cobalt is primarily used in lithium-ion batteries, and in the manufacture of magnetic, wear-resistant and high-strength alloys.

Zinc is used for corrosion-resistant zinc plating of iron (hot-dip galvanizing) and in other applications such as electrical batteries, small non-structural castings, and alloys with copper such as brass.

Tin is used in many alloys, notably tin / lead soft solders, and in corrosion-resistant tin plating of steel. Tin-plated steel is widely used for food packaging as tin cans.

For these ferrous metals and base metals, there is little demand for investments or to store these metals as assets for hedging against inflation, but there is high industrial demand in the construction and manufacturing sectors. This industrial demand will be studied rather than focussing these metals as investments.

Demand for metals are largely impacted by economics. Factors such as GDP, inflation and interest rates all play a factor in both industrial and investment demand for metals. Each of these factors will affect a particular metal differently. Some metals, like gold, will be impacted by all of these economic factors, whereas other metals might not be impacted in the same way, i.e. the demand for gold will respond to different factors than the demand for platinum due to its different functions. If specific industries requiring a specific metal were to experience future growth, the demand for that metal will grow as well, driving up the price specially if no substitutes of that metal can be accepted in the industry. Demand for these metal sources might move in same direction or opposite directions. For e.g., if the domestic economy is growing rapidly and inflation is rising, the investment demand for gold may increase as investors buy gold to hedge against inflation. At the same time, the growing economy will create increased demand for industrial gold as well. This is because consumers buy more electronic products that contain gold. If the economy is contracting, demand for investment gold is also likely to increase as investors purchase gold as a stable investment when equity markets show signs of weakness. At the same time, industrial demand may decrease as consumers demand fewer electronic products in a weakening economy.

Supply is also important but not the primary driver of price for metal futures. The overall supply of metals is limited, but because metals can be re-melted and reused, it increases the available supply by lowering the reliance on new production and smoothing out the supply cycle.

For e.g., once agriculture grain is fed to livestock, it is removed from the supply chain and new supply of the grain must replace it. But since metals can be reused virtually forever due to re-melting and purifying, the metals market supply originates from both existing and newly mined inventories. This theory is good only if there is effective recycling of the metal. For metals that cannot be recycled efficiently, and if there are no practical substitutions, the long term supply of these metals will decrease due to its increasing scarcity. As a result, the price of these metals will go up.

For metals many factors are evaluated to determine which variables has more impact in price than others, to be used as basis for trading decisions.

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