Industrial and Precious Metals Investing: Linking Money, Value, and Economic Growth

The link between precious metals, precious metal prices, and the economy can be traced back more than 2,000 years. Metals have been (and still are) used as money, i.e., payment in exchange for goods and services as well as a store of value. Metals also have countless industrial uses, from everyday household items to the largest skyscrapers and the machines used to build them.

Put it all together, and it’s easy to see why investors, bankers, captains of industry, and policymakers keep an eye on the metals market.

The stock market’s rebound from the March 2020 low to the January 2022 highs was nothing short of impressive. But if the stock market’s performance was impressive, then the metal industry’s advance may be considered equally, if not even more, spectacular. Over the same time frame, metals have advanced double and even triple digits in percentage terms (see figure 1).

So, what might industrial metal and precious metal prices be possibly signaling with regard to investor sentiment, the general state of supply and demand, and the broader stock market in general? Let’s take a look.

Gold: The Traditional Monetary “Safe Haven”

The yellow metal has traditionally been thought of as a hedge against inflation and, for some, a declining stock market. With inflation running at over 40-year highs and equity markets entering a bear market, it’s not unexpected that investors are in search of an investment that can offer some protection from these market events. While gold has historically offered a measure of protection in periods of rising inflation longer term, the benefits in the short term are less certain. 

As of mid-2022, with the Federal Reserve in the midst of raising interest rates to help stem rising inflationary pressures, the risk of slower global growth or even recession has taken some of the luster off of gold in the near term. However, should inflation become entranced and the U.S. dollar begin to weaken, gold may once again fulfill its traditional role as an inflation hedge. According to the Silver Institute, global industrial demand for silver rose from 445.2 million ounces in 2012 to an estimated 539.6 million ounces in 2022. 

Silver: The Monetary-Industrial Hybrid

Silver is in a unique spot. On one hand, it’s a precious metal. Like gold, it too once backed the U.S. dollar when the greenback was pegged to a gold standard. So, silver is still generally viewed as a “safe haven”—a monetary metal.

On the other hand, silver has plenty of industrial uses, including solar energy, lithium batteries powering laptops, and a wide assortment of printed and flexible electronics. According to the Silver Institute, electronic silver demand has surged from under 10 million ounces (Moz) in 2010 to a whopping 48 Moz in 2020, an indication the industrial appetite for silver has been growing at a robust clip because the future’s renewable energy buildout requires more of it.

So, when you think of silver’s price having more than doubled in 2020, it might be worth your attention as an investor as well as a consumer. Is this uptrend an indication of monetary fears—namely, the need for a potential safe haven against inflation—or a reflection of industrial optimism, particularly the global movement toward renewable energy? Or maybe a hybrid of both? After all, silver may shine in both worlds, night and day.

Copper: The Electric Clang of Industrial Expansion

Copper—it’s a lot more than those pennies that used to buy a gumball at the neighborhood shop—especially because those pennies have been mostly made of zinc since 1982.

Copper is a widely used industrial metal. Its applications span a wide range of multi-sector construction and manufacturing, from mega municipal and commercial sites to mass-manufactured products like automobiles, all the way down to the plumbing, electrical, heating, and cooling systems in your home. So, when copper prices rise, investors traditionally view it as a sign the engines of global industry are revving up.

Like most industries across the globe, copper’s mining and supply chain operations took a hard beating during the COVID-19 lockdown. Arguably, shortage of supply may be one of the tailwinds driving its historic 107% price rise from the pandemic low through July 2022.

In addition to “traditional” demand for the red metal, copper is also critical to electric vehicle (EV) production. If the current trajectory holds, the world may be headed toward an EV future in which copper demand could continue to outstrip supply.

Metals and Markets Intertwined, Sometimes Like a Tight Coil

Intermarket relationships can sometimes be likened to a mechanical balance scale with two pans suspended on either side of a fulcrum. When one side goes up, the other side goes down. 

For example, the gold and silver markets generally have a negative correlation to interest rates. That simply means a rise in interest rates tends to have a negative influence on precious metal prices.

And take “Dr. Copper,” a market moniker that endows the red metal with an honorary Ph.D. in economics because it’s popularly believed to forecast global economic turning points. A rise in demand is taken as a leading indicator of economic optimism or health given its widespread use in just about every sector of the global economy.

But heed the caveat: Don’t expect these relationships to move in lockstep with one another. The economy isn’t a machine. There’s no exact synchronicity. Like people, market relationships are organic and driven by human action, not by mechanistic models of production and consumption, and rarely in a straight line.

Can the Sound of Metal Ring an Early Warning System?

Investing in precious metals isn’t for everyone. The metal trade, in general, may not be something most investors are familiar with. Yet, even for those who aren’t interested in investing in precious metals, or industrial metals, metal price trends can offer potential clues to equity investors. They may add another layer of confirmation when you’re trying to forecast the overall market environment.

Some like to look at gold in sync with the Cboe Volatility Index (VIX) and government bonds. When the three move together in the same direction, that could be a sign of trouble for equities as investors head for less-risky ground.

This is just one example of so-called “intermarket analysis”—using data from across various market segments and asset classes to develop a complete picture. But intermarket analysis can sometimes be akin to drinking from a firehose. There are so many places to look and so many data points—all at your fingertips with today’s brokerage platforms. Still, using the industrial and precious metals market as one component of a full fundamental analysis can help you see the big picture.

Consider keeping an eye on the futures market. The thinkorswim platform lists several of CME Group’s (CME) metal futures contracts. Even if you’re not a futures trader—and futures trading isn’t for everybody—futures price trends can be a valuable information source.

Just remember that correlation isn’t necessarily causation, and preparation for potential market turning points isn’t the same as prediction. The precious and industrial metals market might help you forecast or confirm the trends driving the broader market. But as with all forms of analysis, it takes time, dedication, and skill to make this approach usable.