Tag: trading gold

Copper Production

Copper ore is found in the earth’s crust and is either mined from open pits or underground. Most of the world’s copper ore originates from Chile (approximately 30%). The Escondida copper mine in northern Chile is the world’s largest copper mine by reserve. In 2012, it had 32 million metric tons in copper reserves.

Copper ore is processed by breaking the rocks into smaller pieces and is turned into copper concentrates through the process of beneficiation. Then, through the smelting process, copper is extracted from the ore. Once copper is extracted from the smelter, it is melted and cast as anodes. High-purity copper cathodes are created from anodes in the final step of the process.

Copper is a commodity and, if meeting all specifications, can be delivered into exchange-approved warehouses.

Copper Market Fundamentals

Copper supply has increased over the last 10 years in response to China’s industrialization during the commodity “super cycle.” To meet China’s demand, world supply from copper mines doubled over the period 1994-2014. Copper’s price performance is well-linked to the performance of the Chinese economy.

Mining companies have been cutting costs since 2003, and with any fall in demand, cutting the cost of production has been a way to maintain profitability. The collapse of oil prices from $115 per barrel in June 2014 to under $35 in February 2016 also reduced the price of copper because mining and refining are energy-intensive. The currencies of copper-producing countries have fallen, down 10.4% in 2014 from 2013, and down by 13.4% in 2015 from 2014 (USGS, Bloomberg, CME Group). This would have reduced labor costs.

Copper is widely used in both industrial and commercial markets, from electronics and plumbing to power generation, and is viewed as a reliable indicator of economic health. Copper is often referred to as Dr. Copper because of its ability to predict turning points in the global economy.

Other factors that positively impact copper demand are government-backed copper, intensive power infrastructure, home appliance subsidy schemes, and promotion of electric vehicles. The growth in urban population with higher disposable incomes increases demand for buildings, home appliances and consumer electronics.

Aluminum Production

China is the world’s largest aluminum producer, representing 54% of the world’s 58 million metric ton production in 2016, based on International Aluminium Institute data.

Aluminum is produced through the electrolysis of bauxite (aluminum ore). Australia is the number one bauxite producer, followed by China and Brazil. Bauxite is mined, crushed and processed to remove silicon impurities.

Alumina, the common name for aluminum oxide, is extracted from bauxite. Alumina is extracted through aluminum smelting by the Hall-Héroult electrolysis process. This requires a great deal of energy and smelters are often located near hydro-electric power plants. Primary aluminum is then cast into ingots or used in alloys.

Aluminum is a commodity and, if meeting all specifications, can be delivered into exchange-approved warehouses.

Aluminum Market Fundamentals

The production of aluminum has shifted to China over the last 15 years. During this period, demand increased ninefold.

China is therefore both a producer and consumer of aluminum. Currently, there is an over-supply of global aluminum, which has put global prices under pressure.

The production of aluminum requires tremendous amounts of electricity. Many smelters in China connect directly to the electrical grid and provide a baseline power demand for underserviced regions in the country. In China, aluminum production serves more than one purpose; it provides the metal for the domestic market, powers communities and provides jobs and economic growth for many municipalities.

The cost of production in China was around $1550/mt and at the start of 2016 and 35% of producers operated at a loss.

Regional differences in aluminum markets are clear when you compare China to the U.S., which is currently in a structural deficit. Aluminum producers have fared better than copper producers because they have cut production and reduced inefficiencies in response to the lower prices and high stockpiles. Demand for automotive vehicles, which are increasingly aluminum intensive, power transmission investment, housing development and electrical appliances create aluminum demand.

In the U.S., the substitution of aluminum for steel in car manufacturing, such as Ford’s F-150 model, will be positive for demand. Whereas the fall in consumption of carbonated soda drinks, the largest share of demand for can sheet in North America, will weigh on the aluminum demand.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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Introduction to Base Metals

Introduction to Base Metals

Base metals are non-ferrous industrial metals including copper, aluminum, lead, nickel, tin and zinc.

Common Usage of Base Metals

Base metals appear in industrial and commercial applications.

Copper – commonly used in wiring in electrical equipment due to its excellent conductivity.
Aluminum – commonly used in the transportation industry for use in aircraft, cars and bicycles. Being largely resistant to corrosion, aluminum is also used in the food and beverage industry for drinks cans, kitchen foil and packaging.
Lead – is soft, highly malleable and ductile and is predominantly used commercially in the manufacture of batteries.
Zinc – often used in alloys, where a metal is made by combining two or more metallic elements to give improved properties, creating brass by combining zinc with copper. Zinc alloys are often used in industries such as shipbuilding and commercial uses in cars, electrical components and household fixtures.

Who Trades Base Metals?

Different types of firms are actively engaged in Base Metals trading for a variety of reasons. Some firms are hedging a physical price exposure due to their involvement in the supply chain of the metal. Others trade Base Metals as an investment asset.

Trading Base Metals

There are two main ways to manage risk in the base metals markets: by trading futures and options with CME Group, or by trading forwards over the counter. Our base metals futures and options cover a wide range of products and are either physically-delivered or cash-settled using price reporting agency indexes or assessments.

Futures contracts are standardized contracts for the purchase and sale of financial instruments or physical commodities for future delivery on a regulated commodity futures exchange.

Forward contracts are customized contracts between two parties to buy or sell assets at a specified price on a future date and are privately negotiated and traded over-the-counter.

Futures and forwards contracts are similar in nature but note the benefits of trading futures over forwards.

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Regards,
Peter Knight Advisor

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Trading the Metals Markets

Trading the Metals Markets

The metals market is really several markets. Precious metals such as gold and silver are often thought of as jewelry markets while base metals such as copper go into homes and manufacturing. Platinum and palladium are precious metals, but are used in automobiles while gold is many things to many people – a currency, an inflation hedge, a barometer of the economy, a central bank tool and of course, a commodity.

Collectively, metals markets offer investors access to truly global markets that are connected to everything from the computer industry to construction to macro-economics and geopolitics. This brings in a broad range of participants from commercial hedgers, to central banks to institutional traders and individuals looking for opportunities and diversity. The markets are sometimes volatile and unpredictable, which means they also offer flexible and creative trading opportunities, as well as ways to protect and hedge against broader moves in the stock and commodities sectors. Traders looking to tap into this major global commodity sector access to precious and base metal futures virtually 24-hours per day

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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Platinum Product Overview

About Platinum Futures

Platinum futures (PL) at CME Group are an integral part of the global metals market.

With annual production totaling 5% of gold’s annual production and 1% of silver’s annual production, platinum is one of the rarest metals on earth. This extremely rare metal has a variety of uses in transportation and in the manufacture of jewelry and electronics.

The Contract

Each NYMEX Platinum futures contract represents 50 troy ounces of deliverable platinum, with a minimum tick price of $5.00. The contract trades electronically nearly around the clock, six days a week, and traders are able to leverage substantial margin efficiencies when gaining exposure to this liquid market.

Supply and Demand

Production of platinum is highly concentrated, with South Africa and Russia producing 70% and 15% of the annual supply, respectively.

Consequently, the supply, and in turn the price, of platinum fluctuates with the political stability of these countries. The demand for platinum is primarily influenced by its industrial uses.

Catalytic converters, automotive devices that reduce pollution, account for 45% of platinum’s demand. As environmental regulations become more stringent, demand and use for platinum may rise.

Additionally, with its many uses in the technology sector, the metal may move in concert with the broader economy. Platinum’s price is particularly attuned to the strength or weakness of the Japanese economy: 30% of platinum is used for jewelry manufacturing and Japan demands 95% of this jewelry.

Traders looking to take a position in a rare metal that offers some exposure to the broad economy have a valuable tool in the platinum futures contract.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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Silver Product Overview

About Silver Futures

Silver futures (SI) are a valuable tool for investors looking for a precious metal that serves as an inflation hedge while also possessing many industrial applications.

Silver is the most extensively produced precious metal in history and has been mined for six millennia.

Historically, it has often served as a currency and thus it shares many of the inflation-hedge and safe haven qualities of gold. However, unlike gold, which is primarily used in jewelry, silver is widely used in industry as manufactures capitalize on its superior electrical conductivity.

Each NYMEX Silver futures contract represents 5,000 troy ounces of deliverable silver, with a minimum tick price of $10.00 per contract. The contract trades electronically nearly around-the-clock, six days a week, and traders are able to leverage substantial margin efficiencies when gaining exposure to this liquid market.

Silver Supply and Demand

The production of silver is widely diversified across many countries and continents, which helps prevent surprising variations in supply.

However, as silver production is the byproduct of copper, lead and zinc mining, when those metals experience decreased production, silver often rallies. The demand for silver is largely impacted by needs of the industry.

As the best conductor available, even besting copper, around 50% of silver demand is used in the manufacture of electrical appliances and circuitry.

Consequently, the price of silver often moves in partner with the tech sector and the broad economy. Approximately a quarter of the silver supply is used in jewelry and the tableware products.

These practical applications make silver an attractive addition to a portfolio for its capital appreciation qualities. Additionally, silver’s precious metal status help it rise in price as currencies decline in value, which makes silver an optimal instrument for capital preservation.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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Gold Product Overview

Learn about Gold Futures

Gold futures, ticker symbol GC, are among the most widely traded futures products worldwide. Although Gold futures are contracts for physically-deliverable commodities, these products are also critical tools for diversifying portfolios and mitigating risk. Traditionally, gold has been seen as a “safe haven” in times of global economic or political uncertainty, and as such, prices may often move inverse to the U.S. dollar, treasury bonds, and U.S. stock indexes.

The Contract

Each COMEX Gold futures contract represents 100 troy ounces of deliverable gold, with a minimum tick price of $10.00. The E-micro Gold futures contract, symbol MGC, represents 10 troy ounces of gold and trades at a minimum tick price of $1.00. The contracts trade electronically nearly around the clock, six days a week, and traders can leverage substantial margin efficiencies when gaining exposure to this liquid market.

Trading the Contract

Market participants actively trading Gold futures must pay attention to numerous macro factors, both economic and political. U.S. economic and monetary policy, as well as the overall health of the U.S. economy, can heavily impact gold prices, so traders leveraging gold must pay close attention data points such as FOMC statements, inflationary indicators like CPI and PPI, and non-farm payrolls numbers.

Since gold is also used as a hedge for non-U.S. economies, traders must also be highly attuned to issues of political and economic stability worldwide, especially in China, Japan, the Middle East and the Eurozone.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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Fundamentals and Metal Futures

Fundamentals and Metals Futures

The fundamental analyst will look at certain factors to determine where the price of metals like gold and silver might move in the future

There are a few unique factors that the fundamental analyst will use to evaluate trades in the metals futures market, including investment and manufacturing demand.

Uses and Movement of Metals

Many of the metals traded in the futures market are sought after for investment purposes and industrial applications.

The supply and demand of metal futures will be influenced by people using metals as a speculative investment, and those using metals as an input in manufacturing processes. For metals like gold and silver, there is also strong demand from ETFs and other investment funds, as investor appetite for precious metals increases.

For example, gold is used as a speculative investment and in the manufacturing of goods like jewelry and electronics. Gold has always been a unique metal, used as a currency and as a store of value to combat inflation.

Contrast that to copper, where investment demand is virtually non-existent, but the industrial demand is high. The fundamental analyst in this case will look at demand coming from the construction and other industries rather than focusing on copper as an investment.

The demand from each of these sources might move in the same direction at times and in opposite directions at other times.

For example, if the economy is growing rapidly and inflation is increasing, the investment demand for gold might increase as investors buy gold to hedge against inflation. At the same time, the growing economy will most likely create increased demand for industrial gold as consumers buy more products that contain gold.

But, if the economy is contracting, demand for investment gold is likely to increase as investors purchase gold as a stable investment as the equity markets show signs of weakness. At the same time, industrial demand may decrease as consumers demand fewer products in a weakening economy.

Supply

Supply is important for metals, but typically demand is the primary driver of price. The overall supply of metals is limited, but the fact that metals can be melted and reused increases the available supply as existing metals are re-melted, lessening the reliance on new production and smoothing out the supply cycle.

For example, once corn is fed to livestock, it is removed from the supply chain and new corn must replace it. But since metals can be reused virtually forever, the metals market supply comes from existing and newly mined inventory.

Demand

The main factors effecting demand for metals are economic. Factors such as GDP, inflation and interest rates all play a factor in both industrial and investment demand for metals.

Each of these factors will affect a particular metal differently. Some metals, like gold, will be impacted by all of these economic factors, whereas other metals will not be impacted in the same way. The demand for gold will respond to different factors than the demand for platinum.

Conclusion

Fundamental analysts evaluate a variety of factors, to determine which factors hold more weight than others, and then make trading decisions based on these opinions.

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Regards,
Peter Knight Advisor

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Metals Intramarket spreads

Intra market spreads, also known as calendar or time spreads, are where a trader opens a long or short position in one contract month and then opens an opposite position in another contract month in the same futures market on the same exchange.

For example, long Copper futures May and short Copper futures August on COMEX. Essentially they allow traders to express a view on the expected value of assets at different points in time.

Forward Curve Structure and Carries

Traders can express a view about the structure of a metals forward curve. If you expect nearby contract to rise in value relative to the back end of the curve, you can buy that nearby contract and take an opposite position in a long-dated month to benefit from the change in the relationship and the forward curve. Carries may be used to manage futures potions hedges against a change in the underlying physical market being hedged.

Example

If you planned to buy a physical metal for future delivery in November, you would be worried about price changes from now until delivery. In order to hedge this price risk, you would enter into a long futures contract for the same product, also with a delivery date of November. But what happens if the delivery date for your physical metal changes to December?

In order to maintain the hedge, you will need to move the futures position to December. To do this you would sell the November versus December spread. In other words, you would sell the November contract and buy the December contract. The net position of would be a long December futures contract, matching the new physical metal delivery date.

Less Volatility than Outright Futures

Intra market spreads offer a trader exposure to the price of a metal, but with reduced volatility because the time spread tracks changes in relationship between the two contracts, rather than the price of the outright futures contract. The risk is the change in the forward curve impacts the two open positions at different rates, but the difference between the two open positions will be less than the outright value and thus such spreads are less volatile.

Reduced Margin Requirements

If a trader expresses a view on the relative value of metals futures by trading an intra market spread, they may see reduced initial margin requirements. Initial margins may be lower for spreads because of the reduced volatility. For example, the maintenance margin required for one lot long Copper futures Feb versus short Copper futures August on COMEX might be $200 per lot. The outright one lot long Copper futures Feb could be around $3,100 per lot.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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Understanding Futures Spreads

Spreading, a trade in which you simultaneously buy one futures contract and sell another, is a popular strategy among many different asset classes.

One reason they are popular is because they can be less risky when compared to outright futures. And because they are less risky, they also tend to have lower margin requirements.

In this lesson, we will look at the various types of spread trades, including the features that make them valuable strategies for both hedgers and speculators alike.

Types of Spreads

Spreads can be categorized in three ways: intramarket spreads, intermarket spreads, and Commodity Product spreads.

Participants who use these strategies are more concerned with the relationship between the legs of the spread than the actual prices or direction of the market.

Intramarket Spreads

Intramarket spreads, also referred to as calendar spreads, involve buying a futures contract in one month while simultaneously selling the same contract in a different month.

One example would be the buying the March 2018 Eurodollar futures contract and selling the March 2021 Eurodollar futures contract.

Calendar spread traders are primarily focused on changes in the relationship between the two contract months; the goal of this strategy is to take advantage of those changes. In most cases, there will be a loss in one leg of the spread, but a profit in the other leg. If the calendar spread is successful, the gain in the profitable leg will outweigh the loss in the losing leg.

Calendar spreads are also used by hedgers to roll a futures position from one month to the next.

Intermarket Spreads

Intermarket spreads involve simultaneously buying and selling two different, but related, futures with the same contract month in order to trade on the relationship between the two products.

For example, the Gold-Silver Ratio spread is a tool for trading on the relationship between Gold and Silver futures prices. This spread can be viewed as an indicator of the health of the global macro economy.

Market participants can express their views on the economy or the relationship between these two products with this spread.

Commodity Product Spreads

Commodity product spreads involve buying and selling futures contracts that are related in the processing of raw commodities. For example, the Soybean Crush involves buying Soybean futures and selling Soybean Meal and Soybean Oil futures.

The participants in this spread are able to simulate the financial aspects of soybean processing, that is, buying soybeans, crushing them and selling the resulting soymeal and soybean oil. The Soybean Crush spread allows processors to hedge their price risks, while traders will look at the spread to capitalize on potential profit opportunities.

Spread Margins

As previously mentioned, one of the attractions of spread trading is the relatively lower risk versus outright futures positions, and the subsequent lower margins. See how this works with the Soybean-Corn spread.

Assume, the outright margin for Soybean futures is at $3,000 and the outright margin for Corn futures is $1,500.

Rather than posting $4,500 to trade a spread on these two contracts, a trader may receive a 75% margin credit; in other words, the initial margin would be $1,125, which reflects the lower risk in spreading the two contracts as opposed to trading each of them outright.

Conclusion

There are many spread strategies that allow market participants to manage risk and capitalize on potential opportunities.

You can learn more about product-specific spreads in other lessons in this course.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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Understanding Intermarket Spreads: Platinum and Gold