3 Metals That Are Not Gold
Nihar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There a ton of elements that are not gold, but the emphasis on the metal inevitably leans yellow. Gold is one of my least favorite metals, because I just do not buy the story. I buy some of the story so gold is a valid position in any portfolio, but people are a bit aggressive at accumulating exposure to gold via ETFs, miners, and purchasing the metal itself. It seems that this is changing slowly as gold stagnates. Thus it is time to turn to metals that are not so driven by investment demand, and instead serve a purpose. That also makes them cyclical with highs and lows in prices driven by demand. Gold is subject to the same cycle, but the scale might be measured in decades not years. I just want to go over the metals and their uses, and discuss the ETFs that allow for a more direct investment in them. A follow up article will look at some miners for the metals.
1. Palladium is Rare and Useful
Palladium is a precious metal of the platinum group that is used as a catalyst. Palladium is used in the catalytic converters that help lower emissions in automobiles. Automobile manufacturing is the primary source of demand for palladium, though there are some uses in research labs. Being a catalyst, labs usually only need a small amount of palladium, and it can be used over and over. The palladium used in cars is also recyclable, but automotive demand around the world is growing. Palladium also has some electrical properties that warrant its use in computers and cell phones. It also forms an alternative to the much rarer and expensive platinum in the creation of white gold for jewelry, and has some jewelry demand on its own. All these other uses are dwarfed by automotive demand.
There are many uses for the metal and it is possible that other demand drivers will grow, but for now the primary one is automobiles. Investing in palladium requires a close eye on production by auto manufacturers. Palladium should rise as the global economy improves and from increasing demand for automobiles. The ETF to go with for palladium is ETFS Physical Palladium Shares (NYSEMKT: PALL). The current price is around $70. Back in 2011 the price touched $85 before retreating a bit, and the declining in 2012. The price seems to be on an uptrend now. Palladium is a good metal to invest in as part of a commodities portion of any portfolio, but should not be the only metal or commodity in a sizeable portfolio.
2. Aluminum has Abundance and Demand
Aluminum is the most common element in the earth's crust. Iron might be more common in the planet as a whole, but most of it is in the core of the planet. Iron is still extracted and used more extensively, but there is just less of it in the crust. Aluminum has many applications including skin for airplanes, material for heat sinks, ventilation ducts, utensils, packaging, wires, and numerous other uses.
Aluminum can also be recycled, but it is also used extensively in alloys and other compounds. In those cases recycling aluminum might be inefficient. A lot of global demand is being driven by China and other countries experiencing high growth. Europe and the U.S. are experiencing slower growth of demand, but those places already have a high level of demand. The Alcoa earnings call had a good discussion about the growth of aluminum demand. It was pegged at 7% overall for 2013, which is up from 6% in 2012. If the economy improves at an accelerated rate that number could rise higher.
There are two ETFs for aluminum iPath Dow Jones-AIG Aluminum Total Return Sub-Index ETN (NYSEMKT: JJU) and iPath Pure Beta Aluminum (FOIL). Each one follows a different index, but are based on one futures contract. FOIL has not been around too long and is the one with fewer assets. However, its one year return is not as low as JJU's was. Whereas I think palladium as a metal makes a good investment, aluminum seems like a bad choice for a portion of a commodities allocation. Miners make more sense in something that is as heavily cyclical as aluminum. However, if the global economy does really start recovering strongly, with demand picking up in Europe and North America, then aluminum as a metal should benefit. I still prefers miners, though a case could be made for the ETFs.
3. Copper is Older than History and Demand Continues
Copper is used in plumbing, electrical work, thermal applications, but not pennies. Copper is actually a superior conductor of electricity than aluminum. It also dissipates heat better. It is just as corrosion resistant though. Overall copper sees strong use on circuit boards, electrical wiring for buildings, and plumbing. Copper is also 100% recyclable with no loss in quality, except for electrical uses. Recycling copper and obtaining the purity required for electrical uses is not as efficient as simply using newly mined copper.
Copper is so heavily used that there are concerns about peak copper. Growth continues unabated, but there is only as much copper as exists in the ground. Copper might run out as soon as 2025 if you go by the dire projections, but around 60 years from now a copper shortfall is almost guaranteed if nothing substantial changes. That is a long time for nothing to change though, and there could be many developments that take the pressure of copper. Copper is the best metal for some jobs, but economics will trump utility. There are a few copper ETFs, but iPath Exchange Traded Notes Dow Jones - AIG Copper Total Return Sub-Index ETN Series A (NYSEMKT: JJC) is the largest by assets by a gigantic margin. There is a physically-backed ETF in the works, but it is not available yet.
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