Home Beginner Market Structure Everything You Need To Know About Metal Commodities

Everything You Need To Know About Metal Commodities

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What is Metal commodity?

Metals are elements or alloys that are hard in nature when they are in a solid-state. They are usually known for their shiny appearance, electrical conductivity, ductility and fusibility. 78% of the elements in the periodic table are metals. Their origin is from the earth’s surface.

Producing the most common metals requires enormous energy and human resources.

The physical properties of metals are ideal for producing raw materials for buildings and manufacturing of items that we use daily.

Metals find their use in building bridges, homes, office buildings, railways and airports. They also play a significant role in power and storage industries. Metals are used in the components of battery production and the creation of nuclear energy.

Types of metals

All types of metals are broadly classified into two categories:

  • Precious metals
  • Base metals

Precious metals

Precious metals rarely occur in nature. They have high economic value. Precious metals are used as both industrial elements and investments.

The first use is that manufacturer’s use precious metals to make electrical components, jewellery, dental equipment and other things. On the other hand, Investors invest in them by collecting coins and bars made out of it.

The second use is that investments in precious metals by reserve banks and institutions. Intense speculation happens in commodity markets. Precious metal traders trade these metals in the international market. They are seen as a form of money that holds value. The precious metals with an active commodity market include the following metals

  • Gold
  • Silver
  • Platinum
  • Palladium

Gold

Gold is the primary precious metal. Speculators use it as an investment vehicle. The vast demand for gold is from jewellery manufacturers and traders. Many consumers also invest in gold as a form of investment.

Silver

Silver is used in both electronics and jewellery. Traders collect this metal in the form of coins and bars. Before, silver was traded at a fraction of the price of gold. Some traders even trade the spread between gold and silver prices.

Platinum

Platinum is mainly used to make jewellery and catalytic converters for cars. Investors purchase platinum and trade in a similar manner as gold and silver.

Palladium

Palladium is a member of platinum group metals (PGM’s). It is used in making catalytic converters, dental equipment and electronic parts. The demand for palladium is also high from traders.

Base metals

Base metals are primarily used in industrial and commercial applications. They are also used in construction and manufacturing. Since these metals are used every-day, this makes them essential commodities in global markets. The base metals are also defined as non-ferrous metals, excluding precious metals. The most popular base metals and how they are traded is listed below.

Demand from China

Several global aspects influence the trends of metals. This could create some investment opportunities in metals for the long term.

The Chinese economy plays a significant role in determining metal prices. China is massively industrialising and urbanising its economy. As China requires massive infrastructure, all types of metals a key role. The market participants closely monitor how China’s demand and economy change in the years ahead.

To analyse demand, the three areas to consider are:

  • If the number of cars, factories and metal equipment are already high in the country; this means there is more opportunity to recycle. This development reduces metal demand from mining.
  • Restriction on mining activities. If there is reduced production, it can limit supplies and increase prices.
  • Monetary policy of the committee from the People’s Bank of China; Change in interest rate can affect metals demand. Tight monetary policy can suppress demand.

Environmental regulations

The mining industry faces a lot of regulations from global environmental agencies. As mining activities increase contaminated groundwater, causes loss of biodiversity, land erosion, destruction to crops and other problems.

Metals are a basic need for industries and consumers. So the mining industry is beginning to adopt cleaner ways of mining. They have started to use renewable energy sources for mining, advance mining technology and many more. These are the efforts taken by the industry to tackle environmental challenges. At the same time, investors can also profit from investing in these sectors.

Population growth

With an increase in population and urbanisation, demand for metals is ever-increasing. When there is a need to build infrastructure, the demand trend increases. But in underdeveloped countries, the location of mines may be located far away from cities.

Indices

The precious metal indices are:

  • S&P GSCI Precious Metal Index-This index gives the reliable performance of the precious metal
  • S&P GSCI Industrial Metals Select-This a sub-index of S&P GSCI. It acts as a benchmark for investment performance in the industrial metals of the commodity market.
  • DBIQ Optimum Yield Industrial Metals-This index is composed of futures contracts on some of the most liquid and widely used base metals. It reflects the performance of the industrial metal sector.

How are metals traded?

Contract For Difference (CFD’s)

The easiest way to invest in metals is through the use of a CFD derivative instrument. CFD’s allow traders to speculate on prices of precious metal. The value of CFD is obtained by taking the difference between the price of metals at the time of purchase and the current market price. Most of the worldwide brokers offer CFD’s on metals.

The main advantage of CFD is that it allows traders to have an exposure to metal prices without having to purchase shares, ETF’s, futures or options.

Hope you got a gist on what metals are, with respect to commodities. Got any questions? Shoot them down in the comments below.

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