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Metals Trading

Metals Trading – How and Where to Trade Base and Precious Metals

We can’t overstate the importance of precious metals for the economy and their role in our everyday lives. As commodities with a broad application, metals enjoy constant high demand. This makes them a preferred asset for traders and investors alike. But did you know that metals can be a benchmark for the economy’s health? Or that there are metals that are so critical that their absence can hinder the development of several industries all at once?

This guide goes through everything you need to know about trading metals. It ranges from how and where to buy and sell the commodities to what determines the price of precious metals and what it can tell us about the economy.

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What are the Different Types of Metals?

There are two types of metals – ferrous and non-ferrous. The group of non-ferrous metals is divided into two categories – base and precious metals.

Base metals are industrial commodities primarily used for manufacturing, construction, and assembly applications. They tend to oxidize, tarnish or even corrode over time if exposed to air or moisture. Some popular base metals include copper, iron, aluminum, nickel, lead, zinc, and more. These metals are more abundant in nature. They are rarely used for jewelry and aren’t a good way to store value.

As their category name suggests, precious metals are the more expensive and rare cousins of base metals. They are high-end commodities used for jewelry, fine dinnerware, decorations, or simply as a storage of value. They don’t corrode, oxidize or tarnish, meaning they remain in perfect condition for centuries. Precious metals are also scarcer, which makes them more valuable. The most popular precious metals include gold, silver, and platinum. However, there are others as well, including palladium, rhodium, ruthenium, iridium, and osmium.

It is worth noting that some precious metals also have industrial use.

To summarize the difference between base and precious metals, let’s just say that base metals are the backbone of the economy. This is due to their critical importance for the industry, while precious metals are valued higher and serve mainly as storage of wealth.

Ferrous metals, on the other hand, are metals that contain iron. Among them are cast iron, wrought iron, alloy steel, and carbon steel, to name a few. These metals are close to the base metals group in terms of application and industrial value. They are fundamental for many industries and are used due to their tensile strength and durability. They also have magnetic properties.

How and Where to Trade Metals?

There are various ways to trade metals, including futures contracts, ETFs or CFDs. There is also an indirect way to access these markets: owning stocks of mining companies producing those metals or OTC products like mutual funds based on a particular metal. However, the most direct way is to use the futures market.  

On the Shanghai Gold Exchange, the average daily trading volume exceeds 6 million ounces of gold and 140 million ounces of silver. On the Chicago Mercantile Exchange (CME), the equivalent of 22 million ounces of gold, 350 million ounces of silver, and 1.25 million ounces of platinum and palladium are traded daily in futures contracts.

The CME allows you to trade futures and options contracts on the most popular precious, base, and ferrous metals, including:

  • Gold, silver, platinum, and palladium
  • Copper, aluminum, zinc, and lead
  • Steel and scrap

Most exchanges offer full, mini, and micro futures contracts to open up the metals market to small traders or investors with limited capital. Leverage trading is also supported.

If you want to trade more exotic base metals, you can opt for the London Metal Exchange (LME) – the largest exchange for options and futures contracts for base metals.

However, bear in mind that base metals are often traded in bulk by larger brokerage houses, institutional trading firms, or industrial giants. This means the markets can often be a bit more volatile. As such, they might not be the best place for a retail investor or a beginner trader since they can end up victims of the price volatility caused by big market moves. In that sense, ETFs might prove a more comfortable choice than futures contracts.

Precious Metals: Investing in Gold and Silver

Precious metals are a common tool for portfolio hedging and diversification since they tend to perform well in turbulent market conditions. Also, since they are more resilient and durable, their value will likely remain the same or even increase over time.

Precious metals give the biggest number of options for trading and investing. Aside from ETFs, futures and options contracts, stocks, and some OTC instruments, investors can also buy gold and silver in their physical form. This includes buying coins, jewelry, accessories, bullions, bars, collectibles, and other items made from gold, silver, platinum, palladium, etc. However, it is worth noting that such investments are also accompanied by delivery, storage, insurance, and other costs.

According to estimations, over 19 million ounces of gold and 170 million ounces of silver on average are transferred every day only on the London market.

What Determines the Precious Metals Prices?

Like with any other commodity or financial instrument, the prices of the base and precious metals are determined by their supply and demand.

It is common knowledge that since there is a more significant supply of base metals, their prices are usually way lower than those of the rarer precious metals. However, to be able to forecast the supply and demand dynamics, thus the price fluctuations, it is critical to dive deeper and explore what and who can influence them.

Factors Affecting the Price of Metals

Various economic and financial factors determine the price of precious metals. The more of them you keep an eye on, the more precise your price analysis will be. Here are the most common factors affecting the price of metals:

If the mining technology improves, it will lead to faster extraction of larger quantities of a specific metal. This would result in a bigger supply, thus causing a short- or medium-term price drop.

On the other hand, if mine workers in top metal-producing countries go on strike, it will slow exports down and lead to a global supply crunch. The result would be higher prices for the particular metal.

The global lockdowns after the COVID-19 pandemic, for example, which destabilized global supply chains, led to a surge in prices for lithium – a key component for electric vehicle batteries. The disrupted exports from Australia and Latin America, the biggest lithium producers, threw the EV industry into chaos and led to a massive market reversal. The same thing is now happening with the prices of platinum and palladium due to the restrictions on Russia, the world’s leading palladium mining country and the second biggest platinum producer.

Economic uncertainty

Recession periods can shrink industrial production and lead to lower demand for base metals. As a result, their prices can drop.

At the same time, many investors consider gold and precious metals safe haven assets. The demand for storage of value always increases when the economy is shaky. That is why gold prices usually trend upwards when the market is going down.

Geopolitical conflicts

Similar to economic uncertainty, geopolitical stress can also lead to increasing prices of metals. In terms of precious metals, the reason is once again the idea of having a shelter for your wealth. In the context of base metals, prices might rise due to potential risk or actual impact on supply chains.

Strength of the USD

Like most commodities, metals also are dollar-denominated. This makes them dependent on the pricing dynamics of the US currency. Usually, when the value of the USD falls, the price of gold goes up. And vice-versa.

There is also the purely psychological notion that the price of gold is often sensitive to the overall perceived value of fiat or paper currencies.  

Monetary policy

There is a theory that monetary policies like quantitative easing and interest rate dynamics affect the price of precious metals.

The reason for interest rates is related to fixed-income investors. If interest rate changes take a toll on their yields, they might consider precious metals a viable alternative.

However, the stronger link between interest rate changes and the price of metals is the effect on the USD. If interest rate announcements push the dollar higher, the price of precious metals will likely drop.

When it comes to quantitative easing, the reasoning is that the money printing policy can depreciate a currency, thus increasing inflation. And precious metals perform well during periods of high inflation.

Who Trades Metals?

It is also essential to be familiar with the market specifics and the parties participating in each metal’s trading/investment process. Especially since they determine the supply and demand, thus influencing the price.

Let’s take silver, for example, as it is a precious metal with broad industrial and commercial applications. The combination of those factors makes the metal a point of interest to various parties, including:

  • Mining companies
  • Metallurgy and refinery businesses
  • Electronics, automobile, and energy companies
  • Jewelry industry
  • Institutional investors (banks, hedge funds, mutual funds, and more)
  • Prop trading firms
  • Retail traders and investors

This is just a tiny part of the market participants with an interest in silver. And the case is quite similar to other precious metals. With base metals, the group of interested parties from the industrial sector is broader, while small investors and traders don’t participate as much.

These parties can use silver for various purposes – from pure speculation, hedging, or portfolio diversification, to price protection or manufacturing application. The purpose and the manner in which they conduct their trading/investment activity can determine the supply and demand for the particular commodity.

Many market experts consider base metals prices a great benchmark for the state of the global economy. Their prices are closely linked to the outlook for overall economic health since they tend to go up when the economy is in good shape and drop in times of recession.

Here is an interesting fact – economists refer to copper as “Doctor Copper,” joking that it is a metal with a Ph.D. in Economics. The basis for such jokes is that you can often predict turning points in the global economy only by looking at copper prices. Copper is highly reflective of the economy. It sees use in many industries, from heavy industrial machinery to advanced electronics. As a result, its demand can be indicative of expansion or contraction in economic output.

However, looking at the direction of metal prices alone won’t always give you a fair representation of the state of the global economy. It is also essential to consider the rate of the price drops or increases. Small changes can be natural and a result of a particular industry- or country-specific event. However, if the drops or hikes are substantial, the signal for a shrinking/growing economy is way stronger.  


Which is the most precious metal?

Two characteristics define the most precious metal – how rare it is and what its price is. The rarest metal is osmium. In nature, there is only about 1 gram of it per 200 tons of the Earth’s crust. The most expensive one is rhodium, which in March 2021 hit $29,800 per ounce – its highest price ever.

What are the best ways to invest in precious metals?

The most straightforward way to invest in precious metals is through futures contracts. They give you direct exposure to the commodity. If you want to invest in the industry and not the commodity, then ETFs and stocks of mining companies are viable alternatives. You can also buy precious metals in their physical form.

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