Futures Education

Metals

Everybody loves the metals market. It is one of the oldest markets in the world, dating back thousands of years as the discovery of gold, copper and silver influenced significant developments in society. Some of the most sophisticated early metallurgical techniques evolved around the use of copper, which was the first industrial metal. One of the relative newcomers, platinum, was discovered in South America in the early 18th century during the search for gold and silver. Originally known as "little silver," silver that hadn't "grown up," or "unripened gold," platinum was thrown back into the streams that held the alluvial deposits. For many years it was used for counterfeiting gold coins in the New World and Spain.
Today, the New York Mercantile Exchange, or NYMEX, is the largest metal commodity futures exchange in the world. The suite of metals futures traded on the New York Mercantile exchange allow market participants to mitigate price risk in a transparent, liquid, financially secure marketplace.
The New York Mercantile Exchange is divided into two divisions: NYMEX and COMEX. Futures contracts for gold, silver, copper, and aluminum are listed through the COMEX Division. You may have heard of COMEX gold on radio or television programs since it is one of the world's benchmarks for gold prices. Platinum and palladium futures are traded through the NYMEX Division.
The major metals futures market comprises gold, silver, platinum & palladium, copper and aluminum. The first three are considered precious metals and the latter two are considered industrial metals.

Gold

Gold began trading on December 31, 1974, coinciding with the lifting of a 41-year ban on the private ownership of gold by U.S. citizens imposed in the early days of President Franklin Roosevelt's administration during the Great Depression. Today the COMEX gold futures contract flourishes as the world's standard for the gold market.
There is an almost universal appeal for gold as a staple for the supply and expression of wealth. For centuries, gold has been coveted for its unique blend of rarity, beauty, and near indestructibility. Gold is an alluring metal that was once thought to have magical powers. Nations have embraced gold as a store of wealth and a medium of international exchange; individuals have sought to possess gold as insurance against the day-to-day uncertainties of paper money and as an expression of their wealth.
Gold futures provide an alternative to the more traditional means of investing in gold such as bullion, coins, and mining stocks. Gold futures contracts are also valuable trading tools for producers and users of the metal. Commercial concentrations of gold are found in widely distributed areas; for instance, in association with ores of copper and lead, in quartz veins, in the gravel of streambeds, and with pyrites. Even seawater contains astonishing quantities of gold, though its recovery is not economical.
The United States first assigned a formal monetary role for gold in 1792 when Congress put the nation's currency on a bimetallic standard, backing it with gold and silver. During the Great Depression of the 1930s, most nations were forced to sever their currencies from gold in an attempt to stabilize their economies. Gold formally reentered the world's monetary system in 1944 when the Bretton Woods agreement fixed all the world's paper currencies in relation to the U.S. dollar, which in turn was tied to gold. The agreement was in force until 1971, when President Richard Nixon ended the convertibility of the dollar into gold. Today, gold prices float freely in accordance with supply and demand, responding quickly to political and economic events.
Gold is also an important industrial commodity. It is an excellent conductor of electricity, is extremely resistant to corrosion, and is one of the most chemically stable of the elements, making it critical for electronics and other high-tech applications.
A broad cross-section of companies in the gold industry, from mining companies to fabricators of finished products, use gold futures to hedge price risk. Gold also plays an important role in investment strategies as a hedge against inflation and monetary risk.

Gold futures contracts trade in units of 100 troy ounces. The minimum price fluctuation is $0.10 (10¢) per troy ounce and the tick value is $10.00.

Silver

One of the oldest known metals, silver has attracted mankind's interest for thousands of years. In ancient times, silver deposits were plentiful on or near the earth's surface. Relics of ancient civilizations include jewelry, religious artifacts, and food vessels formed from the durable, malleable metal.
Silver also played an important role in the United States monetary system when Congress in 1792 based the currency on the silver dollar, and its fixed relationship to gold. Silver was used for the nation's coinage until it was demonetized in 1965. The turn of the century saw an even more important use for silver as an industrial raw material. Today, silver is sought as a valuable and practical industrial commodity as well as an appealing investment. The largest industrial users of silver are the photographic, jewelry, and electronics industries.
Newly mined metal provides most of the needed supply, and Mexico, the United States, Peru, Poland, and China are the primary producers. Secondary silver sources include coin melt, scrap recovery, and liquidation of private stocks from countries where the export of the metal is restricted. Secondary sources are particularly price sensitive.

Silver futures contracts trade in units of 5,000 troy ounces. The minimum price fluctuation is $0.005 (0.5¢) per troy ounce and the tick value is $25.00.
It is important to note that both gold and silver have mini-sized versions of their respective contracts, making it easier for individuals to trade in this lucrative industry.

Platinum

Platinum production is dominated by South Africa, which accounts for 77% of the world's platinum supplies. Platinum is the principal metal of the six-metal group that bears its name; the other platinum group metals are palladium, rhodium, ruthenium, osmium, and iridium. All possess unique chemical and physical qualities that make them vital industrial materials.
The automotive and jewelry sectors account for more than 75% of world consumption of platinum. Platinum is an important ingredient in the production of catalytic converters. Other uses include glass manufacturing, chemical production, petroleum refining, high-technology electronics, and medical applications.
Platinum is among the world's scarcest metals; new mine production totals only approximately 6.5 million troy ounces a year. In contrast, gold mine production runs approximately 80 million ounces a year, and silver production is approximately 595 million ounces. Due to the scarcity of platinum, like gold, it is also used as a store of wealth.
Because of the metal's importance as an industrial material, its relative low production, and concentration among a few suppliers, prices can be volatile, and platinum is often considered attractive to investors.

Platinum futures contracts trade in units of 50 troy ounces. The minimum price fluctuation is $0.10 (10¢) per troy ounce and the tick value is $5.00.
Closely related to platinum, palladium is the other major metal of the platinum group. It is mined with platinum, which it resembles in many respects, yet there are important differences between the two metals. As with platinum, palladium is also produced as a by-product of nickel mining. Automotive catalysts are the largest consuming sector of palladium, accounting for 66% of demand. Dental alloys account for 14%, electronics, 17%, and others, 3%.
Palladium trades as an independent futures contract in units of 100 troy ounces. The minimum price fluctuation is $0.05 (5¢) per troy ounce and the tick value is $5.00.

Copper

As a primary ingredient in the production of electronics, and one of the oldest commodities known to man, copper, more than any other metal, is said to directly reflect the state of the world economy. It is the world's third most widely used metal, after iron and aluminum, and is primarily used in highly cyclical industries such as construction and industrial machinery manufacturing. Profitable extraction of the metal depends on cost-efficient, high-volume mining techniques.
Due to the international demand for copper, copper prices are directly affected by supply-reducing strikes or political unrest in foreign producing countries. Foreign exchange rates also influence the effective price of copper. Other price factors include government embargos, production curtailments, water shortages, and environmental impact. Most of the world copper trade is controlled by a trade organization called CIPEC, similar to the way OPEC controls the oil market. CIPEC controls roughly 70% of the international trade of copper.

Copper futures contracts trade in units of 25,000 pounds. The minimum price fluctuation is $0.0005 (0.05¢) per pound and the tick value is $12.50.

Aluminum

Aluminum is a lightweight, corrosion-resistant metal and is another important industrial grade metal. Aluminum is used in aerospace, construction material, packaging, automobiles, railroad cars, and thousands of other applications.
Transportation is the largest single consuming sector of aluminum, absorbing approximately 30% of U.S. production. Packaging and aluminum cans take another 20%; building and construction absorbs 10%. The high voltage electric transmission lines that are strung from one end of the nation to the other are often made of aluminum.
Aluminum scrap is among the most easily recycled metals available today. The turnaround between the time a can is tossed into a recycling bin, re-smelted, fabricated, and back on a store shelf can be as little as 60 days.

Aluminum futures contracts trade in units of 44,000 pounds. The minimum price fluctuation is $0.0005 (0.05¢) per pound and the tick value is $22.00.

Summary

Of all the metals traded on the New York Mercantile Exchange, gold and copper are the most actively traded. Gold is the representative for the precious metals and copper is the benchmark for the industrial metals market. When trading the metal futures, be sure to keep tabs on interest rates set by central banks around the world. Make sure you are aware of geopolitical situations. Wars are prominent in many metal producing countries and can disrupt production efforts. Make sure you understand the relationship between currency and metals, the two markets are tightly correlated and movements in one will inevitably create movement in the other.