Is it worth trading CFDs on metals?
Even about 10 years ago, many private traders could not make money on metals, since the corresponding futures traded on COMEX and the London Exchange are among the most expensive (they have a high tick price and strict margin requirements). The situation began to change dramatically after the crisis of 2009, when large dealing centers began to enter the retail financial services market, offering, in addition to currency pairs, special contracts for the difference in prices of underlying assets (CFDs).
At first, such contracts were used to profit from exchange rate fluctuations of popular stocks, but later it became obvious that the commodity market provides much more opportunities for both speculative earnings and the formation of long-term investment portfolios.
Currently, CFDs for metals are presented in the specifications of many forex brokers, while their main distinguishing feature is fractional lots, thanks to which a private trader can open positions with a small initial capital. Today we will analyze the features of trading with these tools.
The financial market consists of a money market and a capital market. This is due to the different nature of financial resources serving fixed and working capital. In the money market, funds are circulating to ensure the movement of short-term loans. In the capital market, there is a movement of long-term savings.
Inside the financial market, there is a stock market. It deals with securities, the value of which should be determined by the assets behind them. The securities market serves both the money market and the capital market. But securities serve only part of the movement of financial resources (in addition to them, there are also intracompany and intercompany loans, direct bank loans, etc.).
The movement of funds in the financial market has a direction from savers to users. Through the financial market, financial resources can be transferred from one sector of the economy to another. In total, there are 4 sectors: households, commercial firms, the public sector and financial intermediaries. Most of the capital of households is formed at the expense of own funds. It is here that the main surplus of financial resources is formed, which is directed to finance commercial firms, the state and is placed in financial institutions (investment funds, banks, etc.).
A characteristic feature of the development of market relations is the rapid development of the financial market and all its links. The modern financial market is a seven-block system of relatively independent links. A link is a market for a certain group of homogeneous financial assets. Such links of the financial market include the money market, the market for loan capital, the real estate market, the foreign exchange market, and the metals market.
To create an investment portfolio, investors often use different tools - stocks, bonds, shares of mutual funds, currency, and metals. Metals are essential tools for long-term and medium-term investors, which provide protection against inflation and serious market fluctuations. On the global market, precious metals (gold and silver) are a liquid instrument that is used by private investors, management companies, as well as hedge funds to diversify portfolios.
All metals are divided into two large groups - ferrous and non-ferrous. In particular, it is customary to include iron, manganese and chromium in the first category (the latter option is controversial, but experts adhere to just such a classification), as well as all alloys that contain these elements.
According to official statistics, the share of ferrous metallurgy accounts for about 90% of all products manufactured in the industry, so logic suggests that futures for iron ore and rolled products should be especially popular on the exchange market.
Nevertheless, the bulk of steel supply contracts is concluded directly between the supplier and the buyer (bypassing the exchange), therefore, the liquidity of the futures market even today leaves much to be desired. For the same reason, brokers are not in a hurry to introduce CFDs for iron and steel into circulation - there will still be no demand from customers for them, and the risk will increase many times, since hedging the overall position is very problematic.
The situation is completely different with non-ferrous metals (they are also called "undesirable"). Recall that this category includes all metals on the surface of which a thin oxide film is formed that protects the element from further exposure to an aggressive environment.
On the exchange market, gold, silver, platinum, palladium, copper, aluminum, zinc and nickel are especially popular in this category.
The precious metals market consists of the following sectors:
- gold market;
- silver market;
- platinum market;
- palladium market;
- market of drag products. metals;
- securities market quoted in gold.
As a systemic phenomenon, the precious metals market can be considered from two points of view: from the functional and institutional.
With functional from the point of view, the market of precious metals and precious stones is a trade and financial center in which they trade and other commercial and property transactions with these assets are concentrated. From this perspective, the functioning of the precious metals market should ensure the industrial and jewelry consumption of precious metals and precious stones, the creation of the state’s gold reserve, insurance against foreign exchange risks, and profit from arbitrage transactions.
With institutional from the point of view, the precious metals market is a collection of specially authorized banks, precious metals exchanges.
The precious metals market includes a combination of various relationships between market entities at the stage of exploration, mining, processing, and so on - until the final manufacture of products from drags. metals.
The most common metal on the market, of course, is gold (XAU) and silver (XAG). The gold market is the most liquid, as it is very susceptible to economic and financial changes (in particular, to increase / decrease in interest rates). In addition, gold has a high correlation with leading world currencies, in particular with the euro and the US dollar.
The cost of metals is fixed twice a day at 10:30 and at 15:30 in US dollars per troy ounce. Prices are fixed on the London Metal Exchange and they are official prices that everyone uses - from market participants to mining companies and central banks.
Global supply and demand has a significant impact on the value of metals. So, with an increase in demand, prices for metals will decrease, and accordingly, on the contrary, with weak demand, the value of metals will increase. However, this effect occurs mainly in the long term and does not change the short-term price.
Any changes / fluctuations in the economy that are reflected in the reports on unemployment, GDP, production activity and when lowering or raising interest rates affect the value of metals by the fact that market participants prefer safe assets, which are metals.
China is a leader in the production of metals such as gold, copper, and aluminum. Therefore, any changes in the production of this country will immediately affect the cost of metals.
In addition, copper is used in all areas of industry, which means that the price of red metal may depend on the situation and trends of the industry.
Trade in metals such as palladium and platinum is much less common than trade in gold and silver. They are characterized by extremely insignificant volatility, therefore, the most conservative market players, as a rule, show interest in them.
The interbank market of non-cash metal includes a wide range of trading operations:
1) Transactions of the "spot" type are carried out on spot terms, that is, with the date of crediting-debiting on the second business day after the day the transaction is concluded. All other metal purchase and sale transactions are called outright transactions (outright - “wrong transactions”).
The Loko-London spot price serves as the basis for price calculations that underlie all other transactions.
The standard transaction volume in gold on spot conditions on the international market is 5 thousand troy ounces, or 155 kg; in silver - 100 thousand troy ounces (one LEC is called, 50 thousand troy ounces - half LEC), or about 3 tons; in platinum - 1000 troy ounces.
2) Swap transactions (swap- "exchange") are the purchase and sale of metal with the simultaneous presence of the reverse side of the transaction. A standard swap transaction is 1 ton, or 32 thousand ounces.
3) Deposit operations. They are carried out when it is necessary to attract metal to the account or, conversely, place it for a certain period. Deposit rates for gold are lower than deposit rates for foreign currency (a difference of about 1.5%), which is explained by lower liquidity compared to foreign currency.
4) Option - the right (but not the obligation) to sell or buy a certain amount of gold at a certain price on a certain date or during the entire agreed period. Such transactions are used for hedging.
5) A futures contract is an agreement between counterparties on the future supply of metal, which is concluded on the exchange. All transactions are guaranteed by the Clearing House of the exchange.
In world practice, gold futures are traded on several exchanges: Comex (New York) and Nimex (New York); Platinum trading: Simex (Singapore), Tokom (Tokyo), Luxembourg Gold Exchange.
6) Forward transactions provide for the real purchase or sale of metal for a period exceeding the second working day. The goal of entering into a forward transaction by the buyer is to insure against future metal price increases in the spot market. The purpose of the forward transaction by the seller is to insure against a future reduction in the price of metal in the spot market.
Where are metals traded?
Despite the development of high-tech industries and the development of more and more types of metal substitutes, the price of final industrial products continues to depend heavily on metal prices. In addition, as a result of the improvement and expansion of the use of certain non-ferrous metals, an increasing interest is shown in such types of raw materials as aluminum, nickel, platinum and others.
Historically, the two largest centers for trading in precious metals are London and New York. The first is known as the oldest center, in addition, the volume of metals trading in London is the largest in the world. The second became famous for the large volumes of futures contracts on metals traded on the NYMEX (New York Mercantile Exchange, translated - New York Mercantile Exchange).
London Metal Exchange
Like other commodities, the value of non-ferrous metals is determined on exchanges such as the London Metal Exchange, the Shanghai Futures Exchange, the Brazilian Commodity Futures Exchange. As the exchange market develops, metal trading has moved from forward contracts to futures. The largest trading platform (in terms of trading volume) is the New York Mercantile Exchange (NYMEX). In 1999, NYMEX was included in the top ten largest exchanges trading futures.
Since 1919, the price of the so-called "London fixing" has been the main reference point for traders around the world and is used in all contracts concluded for the physical supply of metals. That is, in fact, it is in London that the price of gold and silver is determined.
The metals that are traded on the London Metal Exchange are copper, aluminum, lead, zinc, nickel, tin, platinum and palladium.
Trading on the LME site is divided into two sessions. During the morning session
“live trading” (trading on the floor), on the basis of which are established
official quotes for metals. Trading continues at the afternoon session
aluminum alloys, TAPO's (option on the average bid price) and are issued
LME trades six major non-ferrous metals: aluminum, copper, zinc, nickel, lead, titanium and silver, as well as aluminum alloys. Lot size varies from 170 kg for silver to 25 tons for aluminum and copper.
Metals traded on the exchange must be classified by the exchange.
Metal trademark LME is a registered trademark of a metal manufacturer. To register a trademark, it is necessary to perform numerous procedures - for example, receive letters of recommendation from two recognized metal consumers, quality certificates from official control organizations.
The metal on the London Stock Exchange meets the quality requirements of the standard LME contract, is stored in lots and placed in warehouses registered by LME, most of which are located in the ports of Western Europe and the east and west coast of the United States (potential consumers should consider transportation costs for delivery to their destination). This explains the difference between the price at other outlets and the official price at LME.
New York Mercantile Exchange NYMEX
This is the New York Mercantile Exchange, which specializes in trading futures and options on various commodities, including precious metals.
Today, metals such as gold, silver, copper, zinc and aluminum are traded on the stock exchange. Since the exchange centers for trading metals are located in Tokyo, Sydney, Zurich and Hong Kong, you can trade metals 24 hours a day.
Pricing on the New York Mercantile Exchange is based on the conducted bidding. Retail prices and the global situation in the world are the main factors in the dynamics of commodity prices.
New York Stock Exchange "Comex"
Comex is one of the divisions of the New York Mercantile Exchange, which focuses mainly on trading in the underlying and options.
Nymex specializes in the sale of energy and precious metals such as platinum and palladium.
Exchange trade in Russia
In Russia, exchange trading in precious metals is in its infancy. The Russian government began to pay attention to the development of the precious metals market and the need to create a national exchange market in this context only at the end of the 1990s. Nevertheless, today the development of this problem at the federal level leaves much to be desired due to the lack of clear and harmonized mechanisms for the practical implementation of elements of exchange trading in precious metals in Russia.
From year to year and from decade to decade, the purchase of gold remains a favorite way of saving savings, the relevance of which increases during periods of economic instability. The gold exchange rate does not experience short-term fluctuations, so a tool like XAU is very attractive to conservative traders.
Gold is a metal with unique properties that is found in limited quantities on the planet. In its pure form, it is quite soft, malleable, ductile. Its color is yellow and it was this property that gave it the Latin designation Aurum. In a very thin sheet, it gives a little green, and in 999.9 a sample may have a slight reddish.Gold belongs to a group of metals that is not susceptible to corrosion and oxidation processes, along with platinum, palladium, silver, ruthenium, rhodium, osmium, iridium. This is a metal with increased density, so ingots weigh much more than we might think. In the jewelry market, gold is used in various samples, which are measured in numerical value or carats. The lowest grade is 300 samples, it is not used in all countries and contains a very large percentage of impurities. The 750 sample is considered to be the best, in which 75% of the noble metal and 25% of impurities give the metal its inherent strength and external characteristics.
In banks and foreign exchange reserves, gold is stored in bars or coins, which correspond to an indicator of 999.99 gold content, which is 24 carats or 1000 samples. There is even more pure gold - 99.999 - but it is very expensive, since the cleaning procedure is very complicated and costly.
Gold has a very high volatility, so it requires a calm attitude and a thoughtful approach. After a relatively long fall in prices, the likelihood that gold will return to its previous high positions and even exceed them is very high.
There are no special trading strategies for transactions with precious metals: any TS is also applicable to precious metals trading, since all components of trading strategies: technical indicators, linear technical analysis tools, moving averages, react to changes in the price itself, regardless of the type of trading tool.
Gold has always been an indicator of the effectiveness of the global economy. In the period of its growth, when consumption grows and, after it, all sectors of the economy rise, the price of gold falls. And, on the contrary, in case of stagnation of the economy, a rollback or recession - investors perceive gold as the most stable and liquid means of saving capital.
Above you can see a map of world gold deposits.
The main levers formulating the exchange rate of gold relative to other currencies are as follows:
- macroeconomic factors. In recent years, the global economic crisis has had a huge impact on both exchange rates and the value of precious metals, and gold in the first place. No matter how strange it may sound, it is thanks to the crisis that the price of gold rises with enviable stability;
- energy prices such as oil, gas, coal and more. Oil in this list occupies a leading position, and most courses are tied to it;
- US dollar rate, which is the maximum convertible currency in all countries of the world;
- the geopolitical situation, which, like other factors, affects price increases and currency fluctuations. An example of this is the series of political upheavals in the Middle East, which provoked a jump in the value of gold on the stock exchange. The current situation in Ukraine also affects the variation in the price of gold.
Those who start their work in the field of stock games from scratch should simply take into account two simple rules, and in the future, be guided by them in their work:
- With rising oil prices, the price of gold also rises;
- With the fall of the US dollar, the price of gold rises, and vice versa.
The stability of prices and the great demand for precious metals determine the high profitability of such investments.
Gold trading has the following advantages:
- low probability of a significant reduction in quotes;
- market stability;
- high liquidity;
- low risks;
- the possibility of long-term planning;
- good predictability of quotes.
Silver is more volatile than other precious metals, which means significant price fluctuations. At the same time, it is a more reliable asset compared to depreciating currencies, which often makes it an obvious choice for investments. The precious metals market does not experience short-term unforeseen fluctuations in the course of the day, so the probability of obtaining predictable profits when trading silver is quite high.
Strategies for entering into transactions for the purchase / sale of this metal are more effective than gold. Silver is characterized by a higher fluctuation of quotes, which allows you to make forecasts for a shorter period. Such forecasts can be useful, since silver is more than gold, influenced by external and internal factors.
First, world industry plays a large role in the pricing of this metal. Silver mining companies, as well as its main buyers, form the supply and demand in the market. Therefore, when forecasting price movements, it is necessary not only to follow the general trend in high-tech and mining industries, but also to pay attention to individual situations. The production problems of one of the main suppliers or the attraction of investments in its mining business may cause corresponding fluctuations in the market.
Secondly, the price of silver depends on the main factors of the global economy - inflation, GDP growth, refinancing rates and decisions of global central banks. During periods of economic upheaval, metal prices are jumping, as more and more investors seek to protect their capital from febrile changes in the foreign exchange market.
Finally, silver is not an unlimited resource, which means that in the long run its prices will constantly increase. In recent years, its value has tripled, and analysts predict this metal a further upward trend.
Unlike gold trading, transactions involving silver do not require so much capital. At the same time, a relatively wide corridor of price fluctuations allows you to get good profit even when trading in small volumes. In this case, the potential dividends in the medium term may be higher than for transactions with gold.
Silver is best purchased during economic crises, as well as at the time of a strong "overbought" in the market. Trading silver attracts traders due to the following advantages:
- Low probability of price collapse;
- Market stability;
- High liquidity;
- Higher volatility compared to gold;
- Relatively low risks;
- The possibility of long-term planning;
- Predictability of the movement of quotes.
Silver, due to its attachment to industrial consumption, is usually traded closer to the movement of other assets. In the presence of the so-called "bullish orientation" in the market, silver surpasses gold in growth, providing higher profits. However, with a "bearish orientation" - losses in price will be greater. In this regard, you should carefully monitor the quotes, stay up to date with world economic news, study the market you are interested in and trust your experience.
Without a doubt, the most important and popular (from a speculative point of view) non-ferrous metal is copper, which is presented in the terminals under the ticker HG. This tool is attractive primarily for its "technicality", which is why many traders successfully trade with the same name CFDs, without taking into account the fundamental factors.
As you can see, the richest deposits of red metal are in Chile, so the events in this country have a direct impact not only on the actual balance of supply and demand in the real market, but also on the actions of speculators.
An example of such important news is:
- Press releases of large corporations about the intention to open / close mines;
- Workers' strikes;
- Messages about the introduction or cancellation (reduction) of customs duties;
- Devaluation of the Chilean peso;
- News about earthquakes and mudflows (natural disasters can paralyze the work of mines, after all, Chilean deposits are in a seismically dangerous zone), etc.
If the news front is completely calm, a hint about the direction of medium-term and long-term trends can be given by China - the largest producer of electronics, wiring and other products in which copper is the main component.
As a rule, copper rises in price against the background of fast growth in industrial production, and the market enters a bear phase after the slowdown of the Celestial economy. To identify the mentioned trends, the Industrial Production indicator is usually used.
In addition, copper prices are highly dependent on the situation in the construction industry, since a lot of metal is spent on creating electrical wiring when erecting new buildings. Of course, indirectly, this demand is reflected in Industrial Production, but for a more accurate assessment it is better to look at the publicly available indicator "Newly Built House Prices", which reflects the mood in the real estate market.
The higher the index, the more attractive the market becomes for the construction of new homes. If the indicator falls, this is a clear sign of stagnation in the industry, and in such a situation, developers are more likely to use old stocks than to place new orders for materials.
And another important factor that must be taken into account when trading CFDs on copper is related to seasonality. Recall that this term refers to trends that recur almost every year. Typically, such patterns are formed due to climatic factors, the actions of investment funds and production corporations (as an example, we can cite the situation when a company places orders for materials at the same time of the year).
As you can see, copper is in seasonal demand from mid-November to April 25, and sales are often observed from August 1 to November 15. Microtrends also form in May, June and July, but the probability of their development leaves much to be desired.
Of course, seasonality is not a “Grail” and not a panacea for all “trading” diseases. It only at first glance seems that it is enough to buy / sell an asset in the indicated periods, after which the market is simply obliged to move in the right direction.
Ideally, you should combine seasonality, the fundamental factors listed above and technical markup (for example, the direction of the moving average, the values of the oscillators, etc.). Only a comprehensive analysis will accurately assess the current balance of forces and movement potential.
This metal is widely used in all industries, in particular, building materials and structures are made of it (in North America, such demand accounts for about 20% of total consumption), cables, packaging materials, ships, and chemical reagents. But the biggest expense is in the aerospace industry.
The fact is that aluminum structures are one of the lightest, so, coupled with titanium, they have become an integral component of airplanes and spaceships. Unfortunately, there is no CFD on titanium, so you have to limit yourself to trading Al.
The industry “peak” in aluminum production was achieved in 2007-2008, after which, amid the crisis, the output fell twice. This trend has become a "guide" for the aluminum market.
It should be noted that in the future (in the future 15–20 years), a new super-cycle may begin on the aluminum market due to the development of the Solar System by humanity. Indirect signs of this trend are already visible today - even the Boeing company, which for a long time specializes mainly in the manufacture of aircraft, began to assemble spacecraft. What can we say about the development of other corporations that were originally created to go beyond the Earth's orbit (for example, SpaceX).
As for the other industries for which aluminum is important, attention should be paid only to the construction sector in the USA and Canada. All other areas have little influence on the market, plus everything, metal recycling has become popular today.
Zinc and Nickel
If copper and aluminum are present in the specifications of many dealing centers, then the "difference contracts" of zinc and nickel prices are much less common. We can say that it is a great success to see the mentioned assets among trading instruments.
Of course, such low popularity is due to objective factors, firstly, little news and analytics are published on the nickel and zinc market, secondly, the spreads on these contracts are quite high, and thirdly, their prices rarely deviate from the general "commodity "trend.
Nevertheless, if you work long-term, a good clue about the future dynamics of zinc and nickel can be obtained from metallurgy, the electrical industry and the automotive industry, in particular, Zn is widely used as a protective coating for iron parts and is an integral element of some alloys.
As for nickel, the situation with it is even more interesting, since it is used in the production of lithium-ion batteries, which are an integral part of electric vehicles. It is not a secret that today many developed countries put legislative "obstacles" for cars with ICE and encourage the development of alternative energy, so the demand for them will only increase in the future.
If we talk about the medium-term prospects of zinc and nickel, their prices often depend on the current supply situation, in particular, when there is a shortage in the physical market (demand exceeds supply) - speculators push quotes to new highs with their actions.
As you can see, CFDs on non-ferrous metals are quite interesting tools, because in the long run their prices obey the real laws of supply and demand, in particular, copper follows the electronics market, aluminum depends on the “aerospace”, zinc is inextricably linked with metallurgy, and the future Nickel can solve the electric car market.
Unfortunately, a simple trader is far from always able to obtain operational information on the relevant sectors, so many people simply refuse to conduct fundamental analysis. In the decision-making process, relying on only one type of analysis is highly undesirable. When making trading decisions, it is worth considering both fundamental and technical factors.
If we talk about the obvious shortcomings of metal CFDs, then in this regard they do not differ much from all other sites and exchanges. The only thing that negatively affects the trading results is the high spreads and commissions that make intraday impossible.
In general, non-ferrous metals can be considered a good alternative to currency pairs, as their prices strongly correlate with the global economy, but it is best to use the same CFDs solely to diversify the overall portfolio.