Let’s face it: an industrialized society won’t get very far without metals. As more countries around the world enter their own industrial ages, demand for metal both as a building block and as an investment may remain strong.
All About Metals
There are two primary types of metals: precious metals, which include gold, silver and platinum, and base metals, which include copper and aluminum.
Many metals have crossover appeal and don’t serve just one purpose. For example, gold is primarily a safe-haven and used in jewelry, but there’s a small industrial component, as well. Silver is likely the most versatile metal of all. Not only is it a store of value in turbulent times, but it’s used as jewelry and very heavily used in industry.
Commodities are prized as a portfolio diversifier, thanks to their lower correlation with stocks and bonds. When investing in metals, however, it’s important to consider other fundamentals that may support any case for them gaining (or falling) in value. The two different metal types should be evaluated on their own merits because they’re not all influenced in the same way.
Consider platinum, which is heavily moved by changes in demand for automobiles. Platinum is a key component in catalytic converters and that accounts for much of its demand. When sales of cars plummet, platinum’s price often follows.
Global buying also has an impact on the prices of metals, particularly when it comes to buying from China.
Quickly expanding emerging markets, like China and India, require more raw materials – which includes base and precious metals – to keep growing at their phenomenal rates. When metal prices fall, China has been known to step in and build up their reserves, pushing prices back up. Just that happened with copper as recently as this summer.
The U.S. dollar also has an effect on metals. Any perceived weakness in the greenback can push metal prices upward, since they become cheaper for U.S. investors. Precious metals such as silver and gold can also be effective hedges against inflation, which sparks a rush of buying whenever investors believe such a scenario is likely.
Perceived weakness or instability be it political or economic, in a country or region will usually send commodity traders to precious metals since the shiny substances are a good store of value in uncertain times, as well.
The Ins and Outs of Metal ETFs
Potential investors may want to go over the various precious metals ETFs that are available.
Equities. Equity-based metal ETFs are funds that hold mining companies and other companies involved in the production of various metals. There are broad metals ETFs such as SPDR S&P Metals & Mining (NYSEArca: XME), as well as single-metal funds such as Market Vectors Gold Miners (NYSEArca: GDX) and Global X Lithium (NYSEArca: LIT). The performance of these companies are not always correlated to their underlying commodity, but when prices of their commodities are high, profit margins generally improve. For some of the more uncommon metals, such as lithium, equity-based commodity ETFs may be the only way to gain exposure to these assets in an ETF.
Physical. Physical ETFs hold the actual physical commodity, and owners of the ETF own an interest in a fractional amount of the underlying metal. The small retail investor may consider physical ETFs over holding the physical commodity because of costs associated with storage of the commodity. More physically-backed metals funds have made an appearance in recent years, including SPDR Gold Shares (NYSEArca: GLD), iShares Silver Trust (NYSEArca: SLV) and ETFS Physical Platinum (NYSEArca: PPLT).
Futures-based. Most metals, as are most commodities, are traded on futures exchanges. A future is a promise to buy, or sell, a commodity for a set price at a set date in the near future. A majority of the future contracts traded on the exchange floor are settled or swapped for cash before the expiration date. Before ETFs came into existence, futures generally weren’t accessible for small investors. Examples of futures-based metals ETFs include PowerShares DB Silver (NYSEArca: DBS) and PowerShares DB Base Metals (NYSEArca: DBB).
You can find all of the metals ETFs in the ETF Analyzer. To research any fund by holdings, performance and more, click on the ticker to be taken to the ETF Resume page. Since metal prices can change suddenly as a result of demand shifts, consider setting up alerts to be notified of a trading opportunity.