Chapter 2-5 Precious Metal Commodities

Copper

This ductile metal is famed for its thermal and electrical conductivity and graces all kinds of products in homes and commercial applications. Over thousands of years, copper and its alloys have been present in civilization and contributed to the history of humankind. In fact, when alloyed with tin to become bronze, copper gave rise to a new era in development. Contracts on copper and copper futures are traded around the world, but our specifications refer to the COMEX copper futures contract.

Native copper has likely been smelted for several thousand years and appears to have occurred independently in several parts of the world. Bronze and brass from copper alloys are nearly as old with examples found in ancient Sumerian and Egyptian cities. Fresh pink or peachy copper oxidizes on the surface and appears greenish meaning, like gold, copper has a unique natural coloring which sets it apart from the other silvery or grey metals.

 

Easily worked into shapes or pulled into wire, copper has excellent corrosion resistance as evidenced in ancient pipes and artifacts. Copper is second only to silver in terms of its electrical conductivity but because of its relative availability in most areas of the world, the historically lower price of copper has made it the main choice for electrical applications. Copper also enjoys the benefit of being antimicrobial – making copper alloys a top choice for doorknobs that mostly disinfect themselves within eight hours. Ancient people often used copper to disinfect wounds and Hippocrates used it to treat leg ulcers. Copper is also important for plants and animals and occurs in human bone, liver, and muscle. Open pit mines are the main source of primary copper and once the ore has been extracted, smelting and refining can begin.

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Copper can also be recycled and this secondary copper is virtually indistinguishable from primary copper. The following table illustrates global production and usage:

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Important fundamental factors for copper price include economic conditions as well as supply conditions. Like other metals, any political or social issues in the country in which copper is mined can also affect price and volatility. Beyond these concerns, you may also wish to consider the following:

Environmental Issues – Mine waste and possible water pollution has often led to controversy over mining operations. Emissions from smelting and refining are also areas of concern and either of these may cause producers to have to review procedures and practices.

Key Industry Reports – Like many other markets, copper stockpiles or supply and demand data can have significant impact on the market. The International Copper Study Group releases a monthly bulletin and the NYMEX has fact sheets that are worth reviewing.

Potential World Supply – Like oil, copper has a “peak” theory which suggests that production will reach a maximum level and then decline as it is a finite resource. This information would have to be balanced against knowledge of the available copper for recycling as well as the possibility of substitutive metals i.e. aluminum was used in place of copper for wiring during certain periods. Whether for forming tools for everyday living, coins or architectural and infrastructure applications, copper use is global.

Highlights of copper applications are as follows:

  • Prevention of algae growth in water reservoirs and pools
  • Fungicide in agriculture
  • Electrical wires, water pipes, plumbing fixtures
  • Appliance components
  • Industrial machinery
  • Communication devices
  • Supplements for livestock and crops in copper deficient areas
  • Pots and pans, weaponry, musical instruments, electroplated coinage, and more.

Gold

Like no other metal on earth, gold has captured the imaginations and emotions of humans across centuries. From jewelry and sculpture, to a store of wealth and symbol of status few other elements could claim the mantle of historic importance like gold can. Traded on many exchanges with both cash and futures contracts, our lesson will focus on the COMEX futures contract traded in New York.

Gold is a chemical element which occurs as nuggets or grains in rocks. This dense metal is also soft and shiny making it a natural choice for early jewelry and adornments. Gold is also naturally resistant to corrosion giving it modern appeal in dentistry and electronics. A popular choice for use in everything from wedding rings to coins, gold has been located in almost 90% of the land areas on earth. Even the oceans contain gold, however, extracting it would be too costly on a large scale. Gold is normally combined with other metals as pure gold is too soft to be applied in ways that result in frequent handling. Although gold mining is an important source of world gold, it is also one of the most recycled metals today meaning that the supply and demand dynamics are a little removed from the normal production and consumption cycle.

According to the World Gold Council, in 2008 the supply sources of gold could be broken down as illustrated in the following chart:

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Gold mining can be traced back to early Egyptians around 3500 B.C. and the largest known deposit of the yellow metal is in South Africa. At the dawn of the 20th century, the Gold Standard Act was enacted in the US causing them to maintain an exchange rate in relation to other countries on the gold standard, a practice that persisted until 1919. Today, gold mines are operated all across the globe with the most important – or at least prominent – in South Africa, the source of 40 percent of modern gold mining, and China.

 

Important Modern Gold Discoveries

Year

North   Carolian Gold Rush

1803

California   Gold Rush

1843

South   African Gold Reefs

1886

Kalgoorlie’s   Golden Mile in Western Australia

1893

Klondike   Gold Rush, Yukon, Canada

1896

Serra   Pelada, Brazil

1983

 

The latest estimates and projections from the US Geological Survey provide an illustration of world mine production as follows:

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Key Terms and Concepts

Bullion = Precious metals in bar or coin form. These can be used as a vehicle for physical investment in gold. Bars are usually larger than coins. Many popular coins for investment are produced by the national mint of particular countries.

Good Delivery Bar = An acceptable bar of gold which can be delivered against a contract. The London Bullion Market Association has requirements for their Good Delivery bars which include an approved list of refineries. These are the bars normally used on major markets like government gold reserves and central bank reserves.

Carat; Karat = A term for a measure of fineness for gold which is between one and 24 with 24 being closest to pure gold. Often abbreviated as “k”.

Fineness = A term for a precious metal’s purity expressed as a portion of 1,000 parts of an alloy. .999 gold has 999 parts gold, one part another metal. Gold is often alloyed with silver or copper, or both.

Economic Reports Gold can be viewed as a haven for investors due to is historic level of import with regards to wealth, however, it is still a commodity and can move largely associated with the movements of world currencies and vice versa. Important fundamental factors for gold prices include economic conditions as well as supply conditions.

Regional Concentration & Perceived Scarcity The state of mining in South Africa, the jewelry demand in Asia, bullion demand, investment concerns – all add up to a pretty important basket of fundamentals.

Applications Besides jewelry or investment demand, any increase in industrial applications for gold could impact price or volatility.

Gold has been applied to everything from pharmaceuticals to food but continues to be used primary for ornaments.

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Palladium

The official discovery of palladium is attributed to William Hyde Wollaston in 1803, who named the element after an asteroid – Pallas. Palladium is found in ore deposits in Russia, Australia, South and North America. Palladium may often be tied closely to nickel production in places like South Africa, Siberia, and Ontario, Canada. It can also be found in gold or copper ores.

Palladium sources on a global level are illustrated as follows:

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Palladium is soft and silver-white like platinum and does not tarnish in air. It is harder and lighter than platinum. Where commercial deposits are concerned, the largest estimated deposits – over 90% of the world total – occur at the Bushveld Igneous Complex in South Africa and in Norilsk in Siberia. Palladium can also be recycled. According to the USGS, nearly 10,400 kilograms of platinum group metals were recovered from scrap in 2006.

Key Concepts

Regional Concentration – Like platinum, a huge percentage of current palladium mining also confined primarily to South Africa and Russia, leaving the door open for the possibility that any political concerns or regional activity could affect supply. An excellent example of this could be the recent sales of palladium from Russian stockpiles since the overall stockpiles held by the central bank and state are unknown.

Perceived Scarcity – As with other platinum group metals, the possible or perceived global availability of palladium may impact forecasts for future supply.

Applications – New applications, as well as an increase in the existing technologies which employ platinum group metals, could shift the supply and demand dynamics rather quickly. The continued efforts to control emissions are significant especially with a possible shift to palladium rather than platinum.

Palladium is hypoallergenic and can be used in jewelry manufacture, wearing better than white gold. In fact, it has been employed as a jewelry metal since 1939. However, the primary destination for nearly 50 percent of palladium is automobile catalysts. Palladium absorbs large quantities of hydrogen and can also be used to store the same. It is also used as plating for electronics, dental alloys, watch making, surgical instruments, and blood sugar test strips.

Platinum

Often considered more precious than gold, platinum is a rare and fascinating metal. Its resistance to most corrosive elements has made it an ideal choice for several industrial (as well as decorative) applications, but its apparent rarity of occurrence in the Earth’s crust has also made for a volatile market.

The largest production of platinum occurs in South Africa, followed by Russia. Platinum can also be recovered from scrap and recycled.

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This precious metal is one of six metallic elements collectively known as platinum group metals (PGM). The other five members of PGM include ruthenium, rhodium, palladium, osmium, and iridium.

Soil and sediment deposits, otherwise known as alluvial deposits, have proven to be a significant source of platinum, but it can also be found as a byproduct of nickel mining. Approximately eight tons of ore must be mined to produce one pure ounce of platinum. The refining process can be an intensive mix of mining, crushing, milling, mixing, melting, and smelting – this process can take up to eight weeks.

The process is illustrated as follows with data courtesy of the United Nations Conference on Trade and Development:

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Key Terms and Concepts

Norilsk = A nickel and PGM mining company in Russia. One of the world’s largest platinum producers.

Nanoparticles = A suspension of “sub-micrometre-sized” platinum particles for antioxidant or nanotechnology research.

Availability – By far, the most significant area of focus for platinum is its low occurrence in the Earth’s crust. The rarity of platinum compared to other metals has spawned a number of creative attempts to illustrate just how scarce the metal may be, i.e. imagining that all the platinum mined would fit in an average swimming pool or living room.

Regional Concentration – In addition to its apparently limited supply, a huge percentage of current mining is also confined primarily to South Africa and Russia leaving the door open for the possibility that any political concerns or regional unrest could disrupt supplies. An excellent example of this possibility was illustrated by the concern over limited electricity supply to mining companies in South Africa and the likelihood that refining and production would be interrupted – an event which contributed significant volatility to the market.
Applications – New applications, as well as an increase in the existing technologies which employ platinum, could shift the supply and demand dynamics rather quickly. The continued efforts to control emissions are significant in that platinum plays an important role in catalytic converters – however, new technologies have enabled the automotive catalyst creators to substitute other PGM metals, something which may impact the overall percentage use of platinum.

Economic Conditions – Since the largest demand for platinum currently comes from the automotive sector, economic issues which may impact automobile sales may also impact platinum prices.

Owing to its rarity in a pure form, platinum was not as widely appreciated in the past as perhaps gold was. It is said that early Spaniards panning for gold were bothered by the nuisance white nuggets that would appear – an “unripe” form of gold. As research and methods to refine platinum were developed in the eighteenth century, platinum grew to be a symbol of prestige and wealth due to its rarity.

Platinum now enjoys a high level of importance for industrial applications as well as adornments. The second half of the twentieth century saw a rise in the demand for platinum as jewelry, prized for its resistance to wear and tarnish. The appeal of platinum jewelry grew first in Japan – where it was prized for its prestige, value, and purity – and only recently penetrated Western markets.

In the late 1970’s, PGM consumption became highest in applications in the automotive industry and they continue to be used extensively as an oxidation catalyst in catalytic converters and as catalysts in refining fuels. Recent advances have also seen platinum applied in medical treatments, including its use as a component in pacemakers and even as anti-cancer therapy.

Silver

Silver, like gold, has had a long history of use for adornments and currency. This ductile metal has woven its way into history, evidenced by its chemical symbol Ag from the Latin argentums, and even found a home in popular myths as the white ward against evil creatures. Futures and physical contracts trade on more than one exchange, but our specifications are for the COMEX silver futures contract.

On Earth, silver can be found in a native form or combined with gold or other minerals. It has high electrical conductivity; however, its susceptibility to tarnish was an impediment to widespread use in electrical purposes. White and highly reflective when polished, silver has been used as currency and ornament for centuries. When alloyed with other metals such as copper, this precious metal is known as sterling silver and is harder than pure silver.

Silver was likely mined through ancient times, with evidence of mining in islands of the Aegean suggesting that separation from lead was occurring nearly six thousand years ago. Silver can be extracted from ore via smelting or chemical leeching. Large deposits of silver were discovered in the New World – and today, many of the top producing countries are part of the Americas.

The following chart illustrates production of silver from some of the top silver mining nations:

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Like other metals, silver can be recovered from scrap, but mining remains the main source of supply for fabricating silver products as illustrated in the following chart with data courtesy of the U.S. Geological Survey:

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Silver, like gold, can play host to a variety of fundamental concerns which are closely tied into the global economic situation. Since a large portion of use is dedicated to industrial applications, demand for electronic components and other manufactured goods can be tied into the price of silver. Trade of world currencies as well as investment demand for silver bullion can also be important issues to watch.

On the supply side of fundamentals, the concentration of much of the mining of silver in Peru and Mexico can be of importance if there are any political or social events in either of those countries.

Besides the designation of precious metal and the investing demand which may go with that, silver application is used in a variety of industries including dentistry, electronics, soldering, mirrors, nuclear reactors, chemical catalysts, and even medicine. Silver was once widely believed to be a ward against disease and has shown significant broad-spectrum antimicrobial properties. This metal was once used to kill germs prior to the widespread use of antibiotics. It has recently been applied to clothing to inhibit bacterial growth. Research into this side of silver usage is ongoing.

Questions