Our products are government-issued and guaranteed for their precious metals content. Base Metals vs. Precious Metals Base metals are the workhorses of the metal world. Share this post Facebook Twitter LinkedIn. Related posts. Looking Back: 20 Years of Gold Prices Money Reserve What Is the Gold-to-House Ratio? Get My Free Resources Today! Sign up now to gain access to incredible information to help you make the best financial decisions when it comes to diversifying with the power and performance of precious metals.
Base metals serve many purposes, such as construction, as well as or better than precious metals. In addition, some base metals have unique properties that cannot be duplicated by other metals.
For example, nickel is one of the major components of stainless steel, zinc goes into galvanizing steel as a protection against corrosion, and the Roman Empire used lead for many purposes, including pipes, bathtub linings, cosmetics, and paints. Base metals suffer from several significant drawbacks, too, all of which make them less suitable as currencies than precious metals. The first disadvantage is that they are usually not valuable enough to be a compact store of value. For example, lead was selling for less than one U.
Having to haul 50 pounds or more of lead to the store to buy groceries was always impractical, while gold and silver coins worked well. As late as the s, many U. The other notable disadvantages of base metals are their chemical properties and price volatility. Because they oxidize and tarnish more easily, base metals make much less durable currencies.
It is common to find corroded pennies in the United States that are only a few decades old. They corrode so quickly because they are mainly composed of the base metal zinc. On the other hand, gold coins from thousands of years ago are often still in relatively good shape. The prices of base metals are also usually more volatile because of their widespread use for industrial purposes.
When industrial demand dries up, the prices of base metals can plummet. Several exchanges around the world offer contracts to trade in base metals, but the hub of international trading remains the London Metal Exchange LME. The CME's physically delivered futures contracts are designed to meet the needs of the evolving international marketplace. They provide a cost-competitive vehicle to manage price risk for the whole value chain.
Both producers and consumers use futures markets to hedge their price exposure to base metals. Copper miners, for instance, may sell copper futures in anticipation of a mining haul in order to hedge the risk of prices falling before it is ready for market. Electronics producers, on the other hand, may buy copper futures to hedge the risk of prices rising since copper and copper wiring are key components of computer and electronic devices.
By hedging, both the producer seller and consumer buyer of copper are immunized to price fluctuations in the metal while the futures contract is still held and in force.
For those looking to trade in base metals or add some to a diversified investment portfolio, the most direct way is to use the futures market. The CME lists several base metals contracts including copper, aluminum, lead, and zinc. If you do not have access to derivatives markets, you can instead look to commodities exchange-traded funds ETFs that hold base metals.
The Invesco DB Base Metals ETF, for example, tracks an index of base metals and is designed for investors who want a cost-effective and convenient way to invest in commodity futures. The index is a rules-based index composed of futures contracts on some of the most liquid and widely used base metals—aluminum, zinc, and copper grade A.
Basic Materials ETF, which consists of companies engaged in producing basic materials. There are also exchange-traded products that track a single commodity, such as the United States Copper Index Fund. An indirect way to gain access to base metals is by owning the stocks of mining companies that produce them. Alcoa, for instance, is a large aluminum producer in the United States. While iron corrodes and rusts when exposed to water and air, base metals exclude iron by referring only to non-ferrous industrial metals.
Tin tends to be the most expensive base metal, ton-for-ton, followed by nickel, copper, and then zinc. If you own an expiring CME futures contract on a base metal and do not close it out or roll it over to a longer-dated contract, you will be obliged to take physical delivery of the metal. Base metals also are less expensive than their counterpart precious metals because they are so much more common.
Base metals are used in a wide variety of applications. Copper is commonly used in electrical wiring because of its high ductility and conductivity. Its high ductility means it easily can be stretched thin without losing strength.
Copper also is good for wiring since it is the one base metal that resists oxidation and does not corrode as easily. Lead has proven to be a reliable source for batteries, and nickel often is used to strengthen and harden metal alloys, including stainless steel.
Base metals also are used frequently to coat other metals. For example, zinc is used to coat galvanized steel.
While base metals aren't considered to be as valuable as their precious metal counterparts, they do still have value because of their practical uses. According to Investopedia, economists frequently use copper as an indicator for global economic forecasts because of its widespread use in construction. If there's lower demand for copper, that means construction is down, which could be a sign of an economic downturn.
If the demand for copper is up, the opposite would be true. Aluminum is the third most abundant element in the earth's crust trailing only oxygen and silicon and it does the highest volume of trading on the London Metal Exchange LME. Extremely malleable, which means it can be pressed into sheets, aluminum has many uses, particularly in making containers for food or other products.
Metals traded on the LME are contracts for delivery 90 days forward. The third most actively traded base metal on the LME is zinc, trailing only copper and aluminum. In addition to being used to coat galvanized steel, zinc is a common ingredient in coins, is frequently used in die-casting, and has many applications in construction, including pipes and roofing. Actively scan device characteristics for identification. Use precise geolocation data.
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