Precious Metals

The Precious Metal market is a link to an investment world before stocks and bonds, and can be traded for speculation, diversification or wealth preservation. Gold, Silver, Platinum and Palladium also have varying degrees of industrial use. Platinum and Palladium, both Platinum Group Metals (PGMs), provide a crucial function in catalytic converters, whereas Gold and Silver are used across a range of consumer electronics and jewellery.

Precious Metals are famed for their use as a store of value. Over the long term, the purchasing power (i.e. the inflation-adjusted value) of an ounce of Gold remains constant, so much so that in 100AD one ounce of gold was able to buy a Roman his toga, a leather belt and a pair of sandals. Nearly 2000 years later that same ounce of gold will still buy a man a suit, a leather belt and a pair of shoes.

There is a recognised indirect relationship between gold and the equity markets, oscillating in cycles of approximately 20 years. Over the last 100 years there have been 5 turning points in these markets. Had you picked the top of the equity market, sold and moved into gold, then sold gold at its peak then moved back into equities and so on, over the last 100 years you will have turned £1 into £86,000. Had you traded on this trend incorrectly, that $1 would be worth £0.05. This highlights the negative correlation between the two asset classes and is exactly why investors utilise this for diversification.

Industrial Metals

Industrial metals trade on the COMEX and the LME. Once they are refined the metals are delivered to the exchange warehouses across Europe, America and Asia where they are stored until orders are received for their delivery. Through derivative contracts the exchanges allow producers, fabricators, merchants and consumers to hedge against price risk also allowing investors to speculate on price fluctuations.

The commodity bull market started when the demand for industrial metals, primarily from the BRIC economies, started to outweigh the weak supply from the mining industry. The supply was limited by the underinvestment in new projects during the 1990s and was slow to respond.

The year on year GDP figures from China rose from 6.1% in April to 7.9% in July and there is an expectation that India’s GDP will again be above 9% by 2010. Couple this with the lack of investment in mining – as a result of the credit crunch there is less incentive to invest in risky and expensive exploration projects – and we can see similar supply-demand imbalances that we had when the commodity bull market began.