For a while now, analysts and investors have said that we are in the beginnings of a commodities supercycle. The commodities supercycle is driven by a suprasecular low interest rate trend; tightening supply versus rising demand; expansionary fiscal policies; and other factors.
It will see commodities prices rising for at least the next five years. Investors such as Jim Rogers have been warning about the coming supercycle for years, and, it seems, it has arrived. Metal commodities are especially interesting in this commodities supercycle.
They perform a raft of roles in a trader’s portfolio. They are good ways to diversify your portfolio, they hedge against economic uncertainty and political risk and they tie you to broad macroeconomic growth. The question you need to be asking yourself is how do you trade metal commodities.
There are two avenues to trade metal commodities: investing in exchange-traded funds or trading futures contracts. Let’s start with Futures contracts.
Futures contracts are standardized contracts for delivery of a specified quantity of some asset at a specified time in the future. Futures are used to guarantee a product at a specific price, removing price uncertainty. They are also used to diversify portfolios. Many traders trade futures for speculative purposes. An example of a futures trade is if you were to buy a futures contract to take delivery of 10 tonnes of copper 3 months from now at a price agreed upon by you and your counterparty. Futures prices are expectations of future prices. So, in trading futures contracts, you are betting on the direction of prices of an asset.
The CME Group offers a range of futures contracts for metal commodities. The most popular of these are for gold, silver and copper. Readers of the Raremetalblog.com will be aware of just how important gold is in an investor’s portfolio and the potential going forward for the metal. Less popularly traded, and consequently less liquid, are aluminium platinum, steel and uranium futures.
Exchange-traded funds are traded on stock exchanges, just like stocks. The difference with stocks though is that they are invested in physical commodities, or commodities futures. They are low cost and highly liquid. They are a great way to get exposure to metals commodities. Most metals ETFs are futures based. Examples of popular ETFs are Invesco DB Base Metals Fund, the United States Copper Index Fund, iPath Series B Bloomberg Copper Subindex Total Return ETN, and the iPath Series B Bloomberg Nickel Subindex Total Return ETN, among others.
Trading in metal commodities is a high risk but potentially high reward endeavour. Whether your motives are hedging price risk, or taking advantage of market mispricing to profit from future price movements, you can use the universe of tools at your disposal to achieve your aims.
At a time when inflation is rising, and the economy is heating up, metal commodities can be expected to appreciate in value over the next few months and perhaps for much longer. It’s a great opportunity that you should be thinking about taking advantage of.
You just have to be prepared to get on a steep learning curve and brace for the volatility of metal commodities.