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What are base metals?

Base Metals definition

Most investors will be familiar with investing in asset classes such as stocks, bonds, exchange-traded funds (ETFs) and cryptocurrencies. In order to define base metals, we first need to understand another type of asset class known as commodities.

Commodities are basic goods like oil, grain, coffee and natural gas. These commodities can be traded on exchanges just like stocks and funds. They can either be purchased with cash, or investors can use financial instruments like futures, options and contracts for difference (CFDs) to gain exposure to specific commodities.

Base metals are common metals that have a wide range of both commercial and industrial applications and would be used in many different aspects of human society such as manufacturing and construction. Well-known examples of base metals include:

  • Copper

  • Zinc

  • Iron

  • Nickel

  • Tin

  • Cobalt

Unlike precious metals, base metals tend to oxidise, tarnish or corrode over time or when exposed to the elements. They are often more abundant in nature and sometimes easier to mine than precious metals like gold and platinum, so their prices are generally lower.

Where have you heard of base metals?

By definition, a base metal means that the metal is easily found and in plentiful supply. Since they are commonly found and widely used in day-to-day life, there are several situations where you may have heard of them.

Investors should ensure that they do not confuse base metals with precious metals such as gold, silver and platinum or rare metals like cerium or neodymium.

What do you need to know about base metals?

Since base metals, such as copper, are so commonly used in industries like construction, movements in their prices can indicate the condition of entire sectors within an economy. For example, if copper prices are continuing to rise, then the overall economy may be improving. Alternatively, if prices begin to fall, it may be an indicator that the economy is shrinking in crucial areas such as homebuilding.

If we examine the price of copper over the past three years (as of 1 September 2021), we can see that this theory holds true. In March 2020, at the height of the COVID-19 pandemic, the price of copper fell from $0.18 per ounce at the start of the year to $0.13 per ounce as nations declared lockdowns and the world effectively stood still. As fears lifted and the global economy began to stir back into action, so did the metal’s price. Since then, copper has enjoyed a steady uptrend in line with other economic indicators like the stock market and traded at a high of $0.30 per ounce in May 2021.

Investors should be aware that as a general rule, base metals do not provide a good store of value for their wealth due to their low intrinsic value. Investors who are looking to protect their wealth from the effects of inflation might want to consider investing their capital into precious metals such as gold, which have been regarded as stores of value for many years.

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