Precious metal trading – what traders should be aware of

The world’s financial markets represent a vast and increasingly diverse entity, and one that includes a number of different assets and stores of wealth.

One of the most widely traded asset classes is metals, which includes various types of metal that are used in numerous industries and common manufacturing processes. These commodities are usually categorised as either ‘precious’ or ‘base’, with the former describing the most valuable and investible options.

In this post, we’ll explore the precious metal market further, while asking how you can profit in this space.

What are the Different Types of Precious Metal?

In simple terms, precious metals describe rare and organically occurring metallic elements that boast a core, intrinsic value.

Typically, they don’t oxidise or corrode over time, making them ideal as long-term stores of wealth and relatively stable investment options in the marketplace.

The most commonly traded precious metals are gold and silver, while you can also take up positions on assets like palladium and platinum. However, gold and silver are largely considered to be the most secure precious metal investments, which is why they’re commonly referred to as being safe-haven assets.

This is particularly true when it comes to the price of gold, which often gains in value and demand during times of economic hardship (such as the 2020 coronavirus pandemic).

However, we’ve seen the value of gold subsequently decline as the global economy has begun to recover, as demand declines and investors seek out alternative assets.

How to Trade Precious Metals

There’s also a finite supply of gold, which is why many investors like to invest in this precious metal directly in order to access a secure store of wealth that’s relatively predictable.

It’s certainly sensible to invest in gold in this way during times of economic growth, especially if it’s likely that a subsequent crash or recession will subsequently increase value.

The predictability of precious metals also makes it possible to trade assets like gold and silver through derivative vehicles such as contracts for difference (CFDs).

With this type of vehicle, you can speculate on the movement of precious metal prices, making it possible to profit even in instances where the value of gold or silver declines.

Through this market, you can also access vehicles like precious metal futures, spot prices and options, enabling you to execute orders and profit from price shifts without ever having to assume ownership of the underlying asset.

What Affects the Price of Precious Metals?

Like with most assets, the simple rule of supply and demand is the single most important factor on the value of precious metals.

More specifically, a shortage of precious metals or an increased need for commodities such as gold and silver makes them more valuable, whereas an excess of supply or a declining level of demand will drive prices lower.

This interaction has been widely observed in the oil market of late, as gradual increases in the global supply between 2014 and 2016 sent prices falling by a staggering 70%.  

We’ve already touched on how the wider economic climate impacts on precious metal prices, while industrial output is also influential. This is particularly relevant with regards to silver, which is a strong industrial metal and one that’s used commonly in the production of batteries and medical devices.

So, when certain industries decline and the demand for silver declines, its price is likely to fall accordingly (particularly if the supply remains the same or increases).