While gold, silver and the other precious metals often take center stage in the investment world, the real long-term action is in base metals. Industrial metals, such as copper, provide the necessary building blocks for economic growth. After all, you can't build steel rebar out of gold or use silver to run plumbing. It is in the base metals that we can find the catalysts for emerging market expansion.
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The real growth of the base metals complex stems from the enormous growth occurring in China and other emerging markets. As these nations develop their infrastructure, and thirst for modern conveniences, the basic building blocks of such things should strengthen in value. This is evident in China's recent stockpiling of some basic commodities. Commodities and shipping executives from several sources have described the nation in recent months as hording a range of commodities, including aluminum, copper, nickel, tin, zinc, canola and soybeans.
China has also been creating a strategic reserve of crude oil since April. Nearly 90 tankers and various dry bulk ships full of iron ore sit idling in Chinese ports, sometimes for up to two weeks, because port storage operations are overflowing. Imports of coal soared 168% as Chinese utilities bought more foreign coal.
This hording is having a dramatic effect on prices. Both copper and nickel are worth nearly double since the beginning of the year, and even aluminum, with its massive worldwide over-supply, is up 15%. Many analysts predict that this recent commodities binge in the short-term is short lived, but over longer periods of time the base metals and bulk commodities should do well. As China moves into premier nation status and various other frontier and emerging countries become viable, the expansion in the industrial commodities is assured. If analysts are right in the short term, it may provide buying opportunities for longer-term investors.
With the recent proliferation in exchange-traded products, retail investors have many ways to get their hands on commodities, including several devoted to the base and industrial metals.
The heaviest traded and with the largest assets under management is the PowerShares DB Base Metals (NYSE: DBB). The ETF holds futures contracts on three of the most widely used base metals, aluminum, copper and zinc, with the weighting as 23%, 37% and 40%, respectively. The fund has preformed slightly better than the S&P 500 since its inception in 2007, and is down 31%. This is due to the creation of the fund during the peak of the financial crisis. The fund charges 0.75% in expenses and a 0.03% futures brokerage charge.
For investors wanting limited tax headaches (DBB is set up as a limited partnership) PowerShares also offers two exchange-traded notes (ETNs), based off the same index as DBB. The PowerShares DB Base Metals Long ETN (NYSE: BDG) offers investors regular exposure to the base metals and has a two-times leveraged twin, the PowerShares DB Base Metals Double Long ETN (NYSE: BDD). The ETNs also charge 0.75% in expenses and are underwritten by Deutsche Bank AG (NYSE: DB).
Barclays (NYSE: BCS) also offers an industrial metals choice. The iPath DJ AIG Industrial Metals Sub-Index ETN (NYSE: JJM) offers investors exposure to copper, aluminum and zinc, as well as a 14% weighting towards nickle. Over a 10 year period, the index on which JJM is based produced returns of just over 9% annually, with low correlations to major stock indexes. The fund also charges 0.75% in expenses. In addition to JJM, Barclay's line of ETNs offers single base metal exposure through individual notes. Investors can buy notes for copper through iPath DJ AIG Copper Sub-Index ETN (NYSE: JJC), aluminum through iPath DJ AIG Aluminum Sub-Index ETN (NYSE:JJU), lead through the iPath DJ AIG Lead Sub-Index ETN (NYSE: LD), and tin through iPath DJ AIG Tin Sub-Index ETN (NYSE: JJT).
Industrial and base metals offer investors a way to participate in global growth using a non-stock method. By owning the physical commodities needed for expansion, investors can position themselves for long-term success. Using the plethora of exchanged-traded products available, retail and smaller investors can now participate in that growth. The preceding ETFs and ETNs are a great way to do that. (To learn more on exchange traded products, check out our Investopedia Special Feature: Exchange Traded Funds.)
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