Metal ETF Battle Royal

Nihar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Commodities should be a part of every portfolio, but trading commodities is a can of worms. It is hard enough to keep track of the stock market, and jumping into commodities would be a needless headache. Thankfully there are ETFs that allow you to take a position in commodities.

If you want to invest in mining companies, looking at which metals are doing the best can guide you toward the right companies. So looking at metals and the ETFs are a good place to start, because you can use what you learn to look into miners. There are ETFs for almost everything including mining companies.


iPath DJ-UBS Copper TR Sub-Idx ETN (NYSEMKT: JJC) is a futures-based commodity ETF. That means that it has futures contracts instead of actually owning copper itself. This ETF tracks the Dow Jones-UBS Copper Subindex Total Return. Copper is the third most used metal in the world behind iron and aluminum. It is used in electrical wiring, plumbing, and a slew of other things. Manufacturing and construction are probably the two major sources of demand for copper. Copper is almost 100% recyclable, which means that a lot of the world copper supply comes from recycled copper, which keeps prices lower. Copper also tends to be replaceable by other materials, which makes the price volatile.

India and China drive much of the demand for copper. As construction and manufacturing grow in those countries you will see copper increase in price. However, any slowdowns in these countries, such as the recent ones in China, will force copper prices, and therefore JJC, to decline. Although both copper and the ETF's that track it can be propped up by other factors such as QE3,  any price spike is likely to be short-lived.  If I were to take a position in copper I would wait for JJC to dip below $40, and then make sure it has already bottomed out.


SPDR Gold Shares (NYSEMKT: GLD) is probably the most popular metal ETF out there. Shares of this ETF are physically backed by the metal, as opposed to other ETFs that use futures. GLD tracks Gold Bullion.

I dislike gold for various reasons. It is called a commodity, and even I included it here, but I see it as more of a currency. Primary non-investment demand is from jewelry. Other than that gold just plates my HDMI connector for high quality audio-visual entertainment. Industrial demand is dwarfed by investment demand.

Gold has thousands of years of history as a valuable metal, and it's attractiveness is in its limited supply. The last few years gold has risen on fears of epic levels of inflation, but hyperinflation has not materialized. Every easing announcement or stimulus package sends gold higher. I think gold is a risky short-to-medium-term hold, because I think a hard correction is overdue. I could be wrong, and gold could continue to go up unabated; but for me the risk of a gold bubble is very real, which is why I would only invest minimally in this metal. That means if GLD ever goes back below $160 I would take a small position and ride out any collapses for the long haul.


iShares Silver Trust (NYSEMKT: SLV) is a physically backed silver ETF. Silver is an industrial metal that is occasionally used to make jewelry. Its use in industry makes it a volatile metal, and I think it is just a bit too expensive above $30 to buy. I also think it is replaceable in many of its industrial applications, such as in conductors. Silicon conductors are being rapidly improved.

Silver is not my favorite metal, and I actually like it least on this list at the moment. For a pure industrial play, I would go with copper, and for a metal investment gold might be good. I prefer a hybrid and would go with something in the platinum group.


ETFS Physical Platinum Shares (NYSEMKT: PPLT) is an ETF that has shares physically backed by platinum. The platinum group of metals is one of my favorite (yes, I have a favorite series of metals). They are rare metals though, giving them the same supply constraints as gold.  In fact, platinum is 30x rarer than gold.

Platinum is found in jewelry, industrial products, and even biology. Both platinum and palladium have several industrial uses. The metals are frequently used as a catalyst, which means it assists in chemical reactions but is not changed or consumed. A lab or factory can buy what they need, and might never need more.

PPLT has been volatile lately and I think the recent rise is from quantitative easing. Going by historical price action I think I would take a position between $140 and $150. But be careful; palladium represents a direct threat to platinum because it can do much of what platinum can do for cheaper. 


ETFS Physical Palladium Shares (NYSEMKT: PALL) is an ETF backed by my favorite metal: palladium. Most know palladium as a key component in catalytic converters, which are in our cars to reduce emissions. There are other uses in jewelry, dentistry, and electronics, which account for about one-third of demand.

Catalytic converters need very little palladium and platinum. Also, as I mentioned above, a catalyst is unchanged and therefore completely recyclable. I still think the auto industry is and will continue to be a force that drives the price up. As the populations of India and China buy more cars, more palladium will be needed to supply all of them with catalytic converters. It is not as expensive as platinum, and it does not just sit there and look pretty like gold does.

PALL is my ETF of choice. Palladium has been less volatile than platinum. My entry price is somewhere between $60 and $61, though if the boost commodities got from easing fizzles an entry below $61 is feasible. My exit price is $88 or above. The global economy would need to improve drastically. I like palladium into the future.


Palladium is the metal I would go with. If you want a risky bet on economic recovery go with copper. If you are a gold bug then gold is for you. If you like to play it fast and you can go with platinum and try to make a profit off some of those wild swings. However, I prefer the mix that palladium offers me, and I think over the next few years over $88 is a real possibility.

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