Pedal to the Metals: A Metals Futures Explainer

Metals futures can be used to diversify your portfolio or hedge your equities metals exposure. Learn the different ways you can trade metals.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Precious metals: A metal futures primer
4 min read
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Key Takeaways

  • If you’re approved to trade futures, metals futures can be used to diversify your portfolio or hedge your metals exposure

  • Each metal has at least two different contract sizes 
  • Those who are approved to trade futures should learn about the different ways to trade metals

When it comes to physical commodities, crude oil may rule the roost, but the metals are also important. They’re what built civilization—from the tools we use and jewels we sport to the physical and financial infrastructure that makes society function.

Metals may not necessarily be the most liquid instruments, but they play a significant and active role in the global economy. And if you’re looking to diversify your portfolio, you might consider getting to know metals futures.

So, what are the various metals a futures approved investor or trader might trade, what are their characteristics, and what kinds of size and price exposure can metals futures give a trader?

Futures Basics: A Brief Recap

If you’re new to futures trading, it’s crucial to know the basics of futures contracts. Here’s a quick refresher to help you get started:

What is a futures contract? A futures contract is an agreement to buy or sell a predetermined amount of a commodity or financial instrument at a certain price on a stipulated date. Similar to trading options, futures contracts have expiration dates where the contract will expire and stop trading. Most futures traders close (or roll) their futures positions prior to the expiration date to avoid delivery—more on that later. 

What is a “tick”? A tick is the smallest price movement that a futures contract can make. Different contracts “tick” differently—some move in single digits (as in units of one) while others move in fractions (as in 0.10 or 0.25).

What is the dollar value per tick? For each tick, up or down, a futures contract will increase or decrease in dollar value. Some contracts will move up/down by $12.50 per tick; others, like micro contracts, can move up/down in cents (e.g., $0.50) for each tick.

Do I have to worry about delivery? It’s true that some futures contracts are designed for delivery, in commodity or its cash equivalent. “TD Ameritrade doesn’t allow delivery, making it more convenient for the majority of investors who simply seek price exposure,” said Adam Hickerson, director, futures & forex at TD Ameritrade. So, you don’t have to worry about waking up one morning to see a freight truck unloading a pile of metal commodities onto your front lawn because you forgot to close an expiring contract.

The Most Commonly Traded Metals Futures Contracts

There are many metals traded on futures exchanges across the globe. But among those that can be traded, gold, silver, and copper are more common. Now, let’s dig into the details.

Gold: The Monetary Metal Par Excellence

J.P. Morgan, the man himself, famously said in 1912: “Gold is money and everything else is credit.” Although gold has commercial uses, it’s still better known as a monetary metal—a traditional “safe” haven. Don’t forget that gold and, to a lesser extent, silver, once backed currencies when the world was under a gold standard. Gold may not be legal tender, but some will argue it’s still money.

What drives it? Gold can sometimes be inversely correlated to the U.S. dollar, stock market, and inflation rate. “Gold has been considered an asset that might be used to help combat inflation risk. Retail investors looking to gain exposure into gold, whether to hedge against inflation or diversify their portfolio, might consider using gold futures and options as part of their trading strategy,” Hickerson explained.

How can I trade it?

There are three contract sizes available:

  • The standard contract (GC) is equivalent to 100 troy ounces; its tick size (minimum price fluctuation) is 0.10; each tick has a value of $10. Futures traders at TD Ameritrade also have the ability to trade options on the standard Gold futures contract.
  • The mini contract (QO) is equivalent to 50 troy ounces; its tick size is 0.25; each tick has a value of $12.50.
  • The micro contract (MGC) is equivalent to 10 troy ounces; its tick size is 0.10; each tick has a value of $1.

Silver: The Hybrid Monetary/Industrial Metal

Silver is unique in that it’s a monetary metal yet has plenty of industrial uses, including solar energy, lithium batteries powering laptops, and an assortment of printed and flexible electronics.

What drives it? As a monetary and industrial metal, silver responds to investment and industrial demand. Following the latter can be tough because there are multiple industries that have different demand conditions for the white metal. Silver may be notorious for its price volatility, but given its monetary and commercial use, especially its increasing role in green energy production, it’s a metal whose relevance most likely, won’t be going away anytime soon. “For retail investors who are looking to use silver as an inflation risk tool or as a hedge for their portfolio, silver futures and options may be a beneficial tool,” Hickerson noted.

How can I trade it?

Like gold, silver has three contract sizes:

  • The standard contract (SI) is equivalent to 5,000 troy ounces; its tick size is 0.005; each tick has a value of $25. Futures traders at TD Ameritrade also have the ability to trade options on the standard Silver futures contract.
  • The mini contract (QI) is equivalent to 2,500 troy ounces; its tick size is 0.0125; each tick has a value of $31.25.
  • The micro contract (SIL) is equivalent to 1,000 troy ounces; its tick size is 0.005; each tick has a value of $5.

Copper: The Harbinger of Industrial Growth

Copper is one of the most widely used industrial metals. So, when copper prices rise, it’s usually an indication that construction and manufacturing—the engines of global industry—are heating up.

What drives it? Besides copper’s “legacy” demand in construction and manufacturing, copper is a critical component of electric vehicle (EV) production. If the current trend in EV demand continues, EVs may define the future of transportation. Add to this President Biden’s infrastructure plan, continued growth across the Pacific Rim, and general “reflation” efforts post-pandemic—and copper demand might continue to outstrip supply.

How can I trade it?

There are two different futures contract sizes:

  • The standard contract (HG) is equivalent to 25,000 pounds; its tick size is 0.0005; each tick has a value of $12.50.
  • The mini contract (QC) is equivalent to 12,500 pounds; its tick size is 0.002; each tick has a value of $25.

The Bottom Line

Whether you’re looking to hedge your metals exposure or diversify your portfolio, or thinking of trading futures outright or trading options on futures, be sure to familiarize yourself with futures and metals industry fundamentals before “forging” your strategy. Futures trading isn’t for every investor and not everyone will qualify. If it does match your financial goals, strategies, and risk tolerance, metals might play a part among your portfolio’s other return sources.

Futures and futures options trading involves substantial risk, and is not suitable for all investors. Please read the Risk Disclosure for Futures and Options prior to trading futures products.

Investments in commodities are not suitable for all investors as they can be extremely volatile and can be significantly affected by world events, import controls, worldwide competition, government regulations, and economic conditions.

Karl Montevirgen is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.

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Key Takeaways

  • If you’re approved to trade futures, metals futures can be used to diversify your portfolio or hedge your metals exposure

  • Each metal has at least two different contract sizes 
  • Those who are approved to trade futures should learn about the different ways to trade metals

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