From the May 01, 2012 issue of Futures Magazine • Subscribe!

Getting started in metals

Trading 101

ETFs

Metals-backed ETFs, like the SPDR Gold Shares (GLD), are relative newcomers to the trading party, only being launched in late 2004. “Gold always has been one of the bigger futures contracts. The securities world started metals ETFs to compete for the retail marketplace in metals,” says Kurt Johnson, president of Archer Financial Services.

ETFs have similar regulatory oversight as futures, according to  Meger. “Generally speaking, you are not offered the same amount of potential leverage,” he says, adding, “The nice thing about the ETFs is your everyday, less sophisticated investor understands stocks and equities better than they do the futures market. It’s a more straight line buy or sell type trade with very [few] idiosyncrasies in it. There are minor fees that ETFs charge, but that isn’t a significant barrier to trade.”

ETFs are  securities, so you can access metal ETFs through a securities account without opening a futures account.

Although futures allow an investor to take physical delivery at contract expiration, that option does not exist in the ETF structure. “An ETF is a paper transaction, and it always will be. A futures contract is a paper transaction that can be converted into physical,” Platt says.

That ability to buy and hold without having to roll when contract months expire makes them a good option for short- and medium-term investors, Downey says. He cautions, though, to know what you are trading because some ETFs are double or triple price points.

Mining stocks

Finally, some investors may look to mining company stocks. 

Although there is some correlation between a mining company’s stock price and the underlying metals, Meger cautions that it is not a true metals play. “You’re really trading a number of other factors in the price of that particular equity as opposed to the underlying metal price. Those include the [management], whether that company hedges any of its forward production, the financials of that particular company, etc,” he says. “There are a lot of things standing between you and a pure play on a metal. It’s not a bad vehicle, but investors need to understand that it is not a pure metals play.”

Platt adds, “Because there are a number of factors involved, at times mining stocks can outpace a movement in the metals, but at other times they can undershoot.”

The bottom line is that the price of the underlying product is just one fundamental in examining a mining or any other company, so if you have an opinion on a miner, trade the stock, but if you want to trade an opinion on gold, wheat or copper, trade the commodity or ETF based on it. 

Now there are more ways of accessing metals than ever before. With so many options available, there likely is a vehicle available for nearly any type of investor. Before you jump into a trade, though, Meger offers three criteria every trader should consider: “[Know] your time horizon, your expectations for the investment and the costs.” 

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