Investing in the Metals Markets

The periodic table represents the earth's known chemical elements, and some of them make excellent investments. Rare earth metals, along with a selection of elements known as base and precious metals, provide today's investors and active traders with a variety of trading opportunities. They're also often formed into ingots for physical purchases.

Key Takeaways

  • Investors can participate in the base metals market by buying shares of companies like U.S. Steel, futures, options, and various ETFs.
  • Precious metals offer the widest field of opportunities for investors, with mining companies, ETFs for both stocks and the metals themselves, options, futures, and even direct purchases of physical metals.
  • As rare earth metals became more important to both technology and the economy, investors became more interested in shares of rare earth producing companies and related ETFs.

Base Metals

In chemistry, metals that oxidize or corrode easily are referred to as base metals. These industrial metals include copper (Cu on the periodic table), nickel (Ni), aluminum (Al), zinc (Zn), lead (Pb), tin (Sn), and iron (Fe)/steel (an alloy of iron and carbon).

Base metals are generally plentiful and are used in a variety of commercial and industrial applications. These applications include copper plumbing, aluminum cans, and the steel used in automobile production. Because of their abundance, prices for base metals are far below those of both precious and rare earth metals. Their prices respond to changes in demand for the products for which the metals are used.

Investors and traders can participate in the base metals market in several ways. Investments can be made in individual companies specializing in particular base metals production, including steel company U.S. Steel (X) or aluminum company Alcoa (AA). Futures and options contracts of individual metals can be traded, such as copper futures (HG) and options (HX) on CME Globex.

In addition, a wide variety of base metal exchange traded funds (ETFs) exist. One of them is the Invesco DB Base Metal Fund (DBB), which is composed of futures contracts on aluminum, zinc, and copper. The SPDR S&P Metals & Mining ETF (XME) is another, and it is made up of companies involved in the metals and mining industries. Finally, the iShares U.S. Basic Materials ETF (IYM) consists of companies engaged in producing basic materials.

Precious Metals

Precious metals are naturally occurring metallic chemical elements that have a high luster and melting point. They are softer and more ductile than other metals and are less reactive than most elements. Precious metals include silver (Ag), gold (Au), platinum (Pt), and palladium (Pd). Because of their scarcity, precious metals are valuable—much more so than the base metals. They are used for jewelry, art, coins, dental work, medical devices, electronics, and investment purposes.

Like base metals, a wide range of investment vehicles are available to those interested in the precious metals markets. Gold has long been considered a solid investment and is often physically held in the form of jewelry, coins, or gold bars. Particularly during times of economic uncertainty, gold gains popularity as an asset of last resort. Aside from physical possession of precious metals, investors can trade stocks, futures, options, mutual funds, and ETFs based on precious metal holdings.

Examples of stocks include Eldorado Gold Corporation (EGO) and Agnico-Eagle Mines Limited (AEM), both Canadian-based gold producers. Furthermore, the CME Group offers investors a choice of gold futures and options contracts. The full-sized contract is based on 100 troy ounces (GC), while the e-mini gold contract is 50 troy ounces (QO), and the micro gold contract is 10 troy ounces (MGC). Gold options are also available in a contract size of 100 troy ounces (OG). Futures and options contracts are also available for silver, platinum, and palladium.

Precious metal ETFs include the physically backed and heavily traded SPDR Gold Trust ETF (GLD), the VanEck Vectors Junior Gold Miners ETF (GDXJ), and the iShares Silver Trust ETF (SLV). The Invesco DB Precious Metals Fund (DBP) and the Aberdeen Standard Physical Palladium Shares ETF (PALL) are among the other choices available.

Long-term investors should be sure that precious metal ETFs hold physical metals rather than futures, options, or other derivatives. Some of these derivative products are only for trading and tend to lose money in the long run, even when metal prices rise.

Rare Earth Metals

Rare earth metals are becoming increasingly important to the electronics industry and technological advancements. Elements such as lanthanum (La), Cerium (Ce), praseodymium (Pr), and neodymium (Nd) are used in the manufacturing of electronics like smartphones, computer memory chips, cameras, and e-readers.

Rare earth metals are also critical in several military and defense applications, such as night-vision goggles, precision-guided weapons, and stealth technology. Although none of the rare earth metals are exceptionally scarce, extracting and processing them is challenging due to their wide geographic distribution and environmental concerns with processing. Despite their abundance, rare earth metals are valuable because they are hard to get, and they are in high demand.

Investors can gain exposure to rare earth metals through exploration and processing companies, such as Neo Performance Materials (TSX: NEO) and Freeport-McMoRan (FCX). The VanEck Vectors Rare Earth/Strategic Metals ETF (REMX) is a popular exchange traded fund with holdings in rare earth metal companies.

The Bottom Line

The known elements appear on the periodic table. Among these elements are base metals, precious metals, and rare earth metals, which provide various opportunities for investors and traders. While gold has been revered for thousands of years and is likely to remain a popular investment, other elements like palladium and neodymium are attracting attention through a variety of trading vehicles, including stocks, futures, options, and ETFs.

Every investor is unique, so this article should be used for educational and illustrative purposes only. You also need to take your investment horizon, risk aversion, and many other investment criteria into account before making any decisions. Finally, it is generally wise to seek qualified investment advice before making major financial decisions.

Article Sources
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  1. CME Group. "COMEX Copper Futures (HG) and Copper Options (HX)."

  2. Invesco. "Invesco DB Base Metals Fund."

  3. State Street Global Advisors. "SPDR S&P Metals & Mining ETF."

  4. iShares. "iShares U.S. Basic Materials ETF."

  5. CME Group. "Gold Futures Contract Specs."

  6. CME Group. "E-mini Gold Futures Contract Specs."

  7. CME Group. "Micro Gold Futures Contract Specs."

  8. CME Group. "Gold Option Contract Specs."

  9. CME Group. "Precious Metals Products."

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