Metals are a hot area of the market to start the year, with related ETFs and ETNS seeing double digit price gains so far this year.
Though they have differing price drivers, both industrial and precious metals ETFs are seeing investor interest this year as prices rise, with the SPDR Gold Trust (GLD) in particular taking in nearly $5 billion in assets so far this year.
Industrial Vs. Precious Metals
As their name suggests, industrial metals are used in a multitude of commercial and industrial applications. These metals, which include aluminum, copper, nickel, lead and zinc, are used for many different purposes such as automotive manufacturing and electrical wiring and plumbing.
Industrial metal ETFs such as the Invesco DB Base Metals Fund (DBB) and the United States Copper Index Fund (CPER) track indexes composed of futures contracts and tend to do well in periods of strong economic growth.
Precious metals such as gold, silver, palladium and platinum are scarcer in supply than industrial metals and tend to be more valuable. While these metals can be used for decorative objects such as jewelry or art, they still have practical purposes and are used in the manufacture of items like electronics and medical devices.
Precious metals ETFs such as GLD or the iShares Silver Trust (SLV) track the spot price of the metal itself. These ETFs can be viewed as a safe haven, or “risk-off” types of investment and are also sensitive to inflation.
Their differing performance drivers are evident when looking at the historical performance of DBB versus GLD since their inceptions.
But year-to-date, both sets of metals are heating up.
Palladium Top Performer
The Aberdeen Standard Physical Palladium Shares ETF (PALL) has been one of the top-performing ETFs this year, having gained over 58% year-to-date.
The metal is now trading at its highest level on record. The factors behind the metal’s price increase are due to both supply and demand. Russia is one of the world’s largest producers of the metal, producing nearly 40% of the world’s total palladium production last year. Global economic sanctions on the country threaten to disrupt this output.
Palladium demand is driven by the auto industry, though the metal is also used in semiconductor applications and fuel cells for batteries. The metal has taken on an important role in the electric car manufacturing technology, an area that has seen increased focus from automakers around the world, helping to drive up demand.
The nickel market is another that has been affected by the Russia-Ukraine war, with the metal suddenly doubling to a record high above $100K a metric ton. The performance of the iPath Series B Bloomberg Nickel Subindex Total Return ETN (JJN) reflects this exponential surge.
Similar to palladium, Russia is also a large exporter of nickel. The metal is a key ingredient in lithium-ion batteries and is also used in stainless steel. Demand for nickel is expected to grow, making a potential supply disruption more of a shock to markets.
Spot Vs. Miners
One interesting distinction when considering investing in metals is investing in the spot price of the metal or investing in companies that mine the metal. Performance of spot versus miners can differ from one another, making understanding what’s in your metals ETF all the more important.
Year to date, miners have been outperforming the spot price of gold itself. The VanEck Gold Miners ETF (GDX) has gained 22.5% so far this year while the Amplify Pure Junior Gold Miners ETF (JGLD) is up 15.9%.
Christian Magoon, CEO of Amplify ETFs, explained the differing return profiles of gold versus gold miners as follows:
“Gold mining stocks are a leveraged play on gold—both as gold price rises and falls. Gold mining companies have a cost, or breakeven, to mine gold. When gold prices are below that price, these stocks lose money, but oppositely, as gold prices rise above that breakeven price, the difference above that cost is entirely profit,” he said. “While gold prices could be up 10% in a given time, for example, a gold mining company could see the profitability exponentially rise due to that same percentage price gain in gold.”
In other words, should gold continue to follow an upward trajectory, gold miners could be an even better bet than a fund like GLD.