Evdokia Pitsillidou, Risk Associate, easyMarkets
Very few people outside the investing world know that base metals may be traded on the futures and options markets. Even within the trading community, metals trading is often synonymous with precious metals – the glittery earth-rare commodities that are used as currency or other forms of payment. While gold and silver might be great way to diversify one’s portfolio, they are not the only metals that might be traded for profit.
Base metals, which are sometimes referred to as industrial metals, refer to any metal other than precious metals. They are extremely durable and less prone to oxidization and corrosion when exposed to air and moisture, making them ideal for commercial and industrial applications. This also means they are less shiny and more abundant than precious metals, which makes them far less expensive than gold, silver and platinum. In the investing world, base metals are the less talked about cousin of precious metals precisely for these reasons.
The most common base metals traded in the financial markets include copper, lead and tin – metals that have been used for centuries and traded as commodities for a similar amount of time. Other base metal commodities like zinc, aluminum, steel and nickel were introduced into industrial applications later on.
Base metals can be bought and sold on commodity exchanges all over the world. The London Metal Exchange (LME), Chicago Mercantile Exchange (CME) and New York Mercantile Exchange are considered the primary centres for metals trading. With the exception of copper, which is traded in pounds, base metals are traded in metric tonnes.
Why Trade Base Metals?
Investors trade base metals for many of the same reasons they trade other types of commodities – to gain exposure to global markets and hedge against future prices. For example, copper is widely regarded as the “metal with a Ph.D. in economics” because its price is highly sensitive to global economic forces.
As we mentioned earlier, base metals are very inexpensive compared with precious metals, making them much more accessible in large quantities. Given their widespread use in primary manufacturing, base metal prices respond to changes in demand more so than precious metals such as gold. In this sense, base metal prices are linked directly to global economic and industrial events, making them easier to follow than other markets.
How to Trade Base Metals
There are several ways investors may trade the base metals market. Below are three of the most common.
Futures and Options Contracts: Investors may buy and sell individual metals directly on the Comex, CME Globex and LME exchanges. Through options contracts, investors can initiate puts and calls, which give them the right to sell or buy respectively.
Exchange Traded Funds (ETFs): There are several base metal ETFs that track futures prices as well as companies involved in producing base metals. For example, the PowerShares DB Base Metal Fund provides exposure to aluminum, zinc and copper futures.
Stocks: Another way to gain exposure to the base metals market is to invest in individual companies involved in mining or producing base metals.
Base metals play an essential role in the global economy. As investment vehicles, they can be highly lucrative assets that say a lot about broader economic and industrial trends. Best of all, they are easily accessible through online trading platforms, which give traders direct access to the world’s largest commodity exchanges.
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