Complete Guide to Metals Trading

While inflation has eased, economic uncertainty persists. As such, you may be looking for a way to help protect your investments. Because of their low correlation to traditional assets, some investors use metals as a haven during uncertainty.

If you’re considering metals trading, getting up to speed on what it involves and some important factors to be aware of can help you get going.

What Are the Different Types of Metals?

There are two basic categories of metals: ferrous and non-ferrous. Ferrous metals (derived from the Latin word for iron, ferrum) contain significant amounts of iron, usually more than 50% by weight. By contrast, non-ferrous metals hold little to no iron. Ferrous metals are more abundant and less valuable than non-ferrous metals.

Because of their iron content, ferrous metals, such as cast iron and wrought iron, are strong, hard and magnetic, making them valuable for use in things like bridges, cars, shipping containers and skyscrapers. However, they’re also more susceptible to rust and corrosion when exposed to moisture and oxygen.

Non-ferrous metals, malleable, resistant to rust and non-magnetic, can be broken into base metals like aluminum and copper and precious metals like gold and silver.

Base metals are used in everything from cookware to aerospace equipment. Precious metals also have industrial uses and are more valuable because of their rarity. They offer investors a store of value because they don’t depreciate. Because base metals are finite, their value tends to increase over time.

What Are Precious Metals?

Precious metals are rare and expensive. Historically, they were used as currency before becoming a commodity.

Precious metals have long been used for jewelry. Thanks to their conductivity properties and resistance to rust and corrosion, they’re also used in electronics and solar panels.

In the precious metals market, the most common metals are gold, silver, platinum and palladium.

These metals are traded through various instruments on several markets worldwide, including the Commodity Exchange (COMEX), Shanghai Gold Exchange, London markets, New York Mercantile Exchange (NYMEX), Chicago Mercantile Exchange (CME) and Tokyo Commodity Exchange.

Precious metals are still bought and sold in physical form, such as bars and coins.

How to Trade Precious Metals

As an investor, you have many ways to buy and sell precious metals. You can trade them through futures and options contracts, exchange-traded funds (ETFs), contracts for differences (CFDs) or customized contracts through over-the-counter (OTC) markets.

Educating yourself and carefully considering the broker you choose to work with can go a long way in supporting your precious metals trading. Select a reputable broker by evaluating its metals trading platform, protocols for security and resources available for beginners, such as a demo account where you can practice trading.

What Are Base Metals?

Base metals are more abundant, making them easier to mine than precious metals and far less complex to extract from their ores. This availability and ease of extraction make them less expensive than precious metals.

Base metals, which include copper, aluminum, lead, nickel and zinc, can be found around the home in plumbing pipes and electrical wiring. Brass, a copper-zinc alloy, is used in electrical appliances, ornaments, locks and more.

How to Trade Base Metals

Because of their variable uses, base metals can be traded in many ways, including by investing in ETFs, buying mining company stocks and trading futures and options contracts through commodity exchanges.

Base metals have numerous commercial and industrial uses, creating great demand. They trade in high volumes, meaning there are buyers and sellers readily available on exchanges like the London Metals Exchange and CME.

Among popular stocks for trading metals are Glencore plc (OTCM: GLNCY), ArcelorMittal (NYSE: MT) and Rio Tinto (XASX: RIO). Popular base metals ETFs include VanEck Vectors Steel ETF (ARCX: SLX), United States Copper Index Fund (ARCX: CPER) and Global Lithium & Battery Tech ETF (ARCX: LIT).

Factors Influencing the Price of Metals

Adding trading metals to your investment strategy can help diversify your portfolio. However, it’s important to know that the prices of metals can be influenced by several factors, including the following.

Economic Scenario

Economic events, such as changes in inflation, interest rates and currency exchange rates, can influence the price of gold and silver. You must monitor economic news closely to keep up with the value of your investment.

The price of precious metals typically rises with inflation, and interest rate changes can impact a mining company’s ability to borrow. The gross domestic product (GDP) and central bank policies can also influence prices and investor behavior.

Strength of the U.S. Dollar

Because a lot of metals trading is done in U.S. dollars, gold and silver prices are tied closely to the dollar. The relationship is inverse, meaning the values of precious metals tend to rise when the dollar falls and vice versa.

Throughout 2024, the dollar has held strong, putting downward pressure on gold and silver although investors continue to put money in gold and silver amid uncertainty. As central banks lower interest rates, the pressure on prices for precious metals could change quickly.

Industrial Output

While the price of silver often follows gold, silver and base metals, especially those considered industrial metals, are also impacted by industrial output.

Silver is used in photography, solar energy and batteries, among other things; copper is important for plumbing, electrical wiring and construction; aluminum is a staple of the aerospace industry; and zinc and nickel are employed to create alloys with broad industrial applications.

Increased industrial output raises the demand — and the price — of all of these metals.

Monetary Policy

The impact of monetary policy on gold and silver prices is evidenced by the gold rallies during global central banks’ quantitative easing. Gold rallied between 2008 and 2012 and again between 2019 and 2021 as interest rates trended down and hovered around zero during financial crises.

Gold and silver generally have an inverse relationship with fixed-income investments, such as bonds. Since it doesn’t generate interest, it becomes attractive as falling interest rates depress the yields of fixed-income investments.

Geopolitical Events

Geopolitical events like wars, economic sanctions or political instability can disrupt supply chains or mining operations, leading to shortages that drive up prices. During periods of political uncertainty, investors often seek a haven in precious metals, further driving up demand in support of higher metal prices.

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Make Trading Metals Part of Your Investment Strategy

In general, metals lack correlation with traditional investments. That means metals trading can diversify your portfolio and insulate it against any one asset tanking your investments.

All investments come with risks, of course. But by educating yourself, finding a reputable broker, staying on top of economic news and developing a sound strategy, you can find great success adding base and precious metals to your mix of investments.

Frequently Asked Questions