When it comes to investing in commodities most traders look to precious metals. However, often overlooked is the group known as the base metals, which includes copper, aluminum and zinc. For those who don’t follow the movement of these metals it's important to understand that they are generally used for industrial purposes such as creating wire, cables, electric motors, packaging, construction and much more. This group does not get nearly the same attention as gold and silver, but you’ll find that prices have been slowly rising over the past few weeks and have increased by 4.15% so far in 2014, as measured by Powershares DB Base Metals ETF (DBB). (For more, see: Investing In The Metals Markets.)

Strong Uptrend In Base Metals

Most active traders use long-term moving average to gauge the direction an asset’s trend. One of the most common buy signals is generated when the 50-day moving average crosses above the 200-day moving average. This bullish crossover is known as the golden cross and it marks the beginning of a long-term uptrend. As you can see from the chart below, the golden cross occurred in early July and strong upward momentum has been the story of the day ever since. As the price nears the support of the influential 50-day moving averages it would not be surprising to see the bulls start to add to their positions. Risk tolerant traders will want to protect their position by placing a stop-loss order below the 200-day moving average, which is currently trading at $16.45. (For more on this topic, see: Moving Average Strategies.)

Aluminum Is The Metal Of Choice

In the same way that there is an ETF for the basket of base metals, its also possible for traders to buy into an exchange traded fund that tracks a specific industrial metal such as aluminum. The iPath DJ-UBS Aluminum Total Return Sub-Index ETF (JJU) was specifically developed to reflect unleveraged returns in aluminum futures contracts. Economic speculation, such as the recent rumor that China will likely continue to stimulate its economy, tends to be the primary driver of base metal prices. Based on the chart, you’ll see that the golden crossover has triggered an increase in trading interest and it would not be surprising to see traders use this information to trader major aluminum producers such as Alcoa Inc. (AA). (For more, see Using Base Metals As An Economic Indicator.)

When it comes to aluminum, Alcoa is the world’s largest producer. As mentioned, recent increases in prices will likely cause money to flow towards the company’s shares. Based on the chart, you’ll see that Alcoa has been trading with an extremely strong uptrend over the past twelve months and increases in the underlying commodity suggest that the trend is likely to continue. Notice how the price has not dropped below its 50-day moving average since the golden crossover in late 2013. This strong support will likely be used when traders look for a level to set their stop-loss orders.

The Bottom Line

When trading metals, the precious ones see the most attention. However, astute traders are now turning their attention to base metals. Many are turning to the Powershares DB Base Metals ETF (DBB). More adventurous traders who want to trade in the strongest component are turning to aluminum and the Aluminum Total Return Sub-Index ETF (JJU). As shown above, rising prices also make an interesting catalyst for miners of the underlying commodities. When it comes to aluminum your focus probably should be on Alcoa. (For more, see: Top Base Metal Plays.)

At the time of writing, Casey Murphy did not own shares of any company or fund mentioned in this article.

Related Articles
  1. Fundamental Analysis

    Using Base Metals As An Economic Indicator

    Base metals may not glitter like gold, but they can still guide an investor to a conclusion about overall economic health.
  2. Chart Advisor

    Bumpy Roads Ahead In Transportation

    Investors are keeping an eye on the transportation industry. We'll take a look at the trend direction and how to trade it.
  3. Investing

    How ETFs May Save You Thousands

    Being vigilant about the amount you pay and what you get for is important, but adding ETFs into the investment mix fits well with a value-seeking nature.
  4. Mutual Funds & ETFs

    3 Fixed Income ETFs in the Mining Sector

    Learn about the top three metals and mining exchange-traded funds (ETFs), and explore analyses of their characteristics and how investors can benefit from these ETFs.
  5. Mutual Funds & ETFs

    Top 3 Commodities Mutual Funds

    Get information about some of the most popular and best-performing mutual funds that are focused on commodity-related investments.
  6. Investing News

    Oil Prices Expected to Surge in 2017

    Oil has made headlines for its plummeting prices this year. When will prices rise again?
  7. Chart Advisor

    Agriculture Commodities Are In The Bear's Sights

    Agriculture stocks have experienced strong moves higher over recent weeks, but chart patterns on sugar, corn and wheat are suggesting the moves could be short lived.
  8. Investing News

    Top Tips for Diversifying with Mutual Funds

    Are mutual funds becoming obsolete? If they have something to offer, which funds should you consider for diversification?
  9. Professionals

    Top Stocks to Short, Go Long On to Beat the Market

    A long/short portfolio can help weather a variety of market scenarios. Here's how to put one together.
  10. Economics

    The 4 Countries That Produce the Most Food

    Learn about the four food superpowers -- China, India, the United States and Brazil -- and what sets them apart from the rest of the world.
  1. Can mutual funds invest in commodities?

    Mutual funds can invest in commodities. In fact, mutual funds may provide a better way for investors to gain exposure to ... Read Full Answer >>
  2. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  3. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  4. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  5. How do futures contracts roll over?

    Traders roll over futures contracts to switch from the front month contract that is close to expiration to another contract ... Read Full Answer >>
  6. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!