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 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.
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.
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.
Did you know that CME Institute classes can fulfill CFA and GARP continuing education requirements? Every CME Institute course can be self-reported in your CFA online CE tracker and select classes can be used for GARP credits. See which of our classes qualify for GARP credits here.