Portfolio Diversification: What Australian Traders Need to Know About Trading Metals

Diversifying the investment portfolio is essential for reducing risk and increasing returns over the long term. For Australian traders, the options for diversification are vast, but metals are one asset class that often gets overlooked. This blog post takes a closer look at what traders need to consider if they want to trade metals in Australia.

Types Of Metals

The most common metals traded on the global market include gold, silver, platinum, and palladium. Each metal has its unique characteristics and is used for different purposes.

• Gold

Gold is widely considered a haven asset and is often used as a hedge against inflation and economic uncertainty. As a result, gold is a popular choice for traders looking to diversify their portfolios. The demand for gold has picked up pace post-pandemic in Australia. 

• Silver

Silver has both industrial and investment uses and has recently hit a new high in demand in Australia, making it a versatile metal to trade. Its value is often tied to the price of gold, and the metal is used in various electronic devices and jewellery.

• Platinum

Platinum is a rare metal used primarily in catalytic converters, which reduces harmful emissions from vehicles. As the demand for more eco-friendly cars increases, platinum can be an attractive investment for traders.

• Palladium

Palladium is another rare metal that is used mainly in catalytic converters. It is a relatively new player in the metal market, and its price has steadily increased in recent years.

Factors Affecting Metal Prices

Like any investment, the price of metals is influenced by various factors. Some of the most significant factors affecting metal prices include:

• Supply And Demand:

The supply of metals is limited, and the demand for certain metals can fluctuate. For example, if there is a high demand for vehicles that require platinum in catalytic converters, the price of platinum is likely to increase.

• Economic Conditions

The state of the global economy can significantly impact metal prices. For instance, if the economy is doing well, the demand for metals may increase, leading to prices rising.

• Geopolitical Events:

Geopolitical events, such as wars and natural disasters, can disrupt the supply of metals and lead to price fluctuations.

• Central Bank Policy:

Central bank policy, such as interest rate changes, can also impact metal prices. For example, if interest rates rise, the price of gold in Australia may fall as it becomes less attractive to investors.

Ways To Trade Metals

Traders can access the metal markets through various channels, including:

• Futures Contracts:

Futures contracts allow traders to buy or sell a set amount of a particular metal at a predetermined price and date. This type of trading allows Australian traders to trade metals at high leverage, but it also comes with increased risk.

• Exchange-traded Funds (ETFs):

ETFs expose a basket of metals or a specific metal, such as gold or silver. ETFs are a low-risk way to invest in metals and are a popular option for traders looking for diversification.

• Physical Metals:

Traders can also buy physical metals, such as gold bullion or coins, as investments. This option allows traders to hold the metal in their possession and potentially benefit from any price increases.

Pros Of Trading Metals

• Diversification:

Metals can provide diversification to a portfolio, reducing overall risk. Metals have a low correlation with other asset classes, so that they can act as a hedge during market downturns.

• Liquidity:

Metals, especially gold and silver, are highly liquid assets that can be easily bought and sold. This makes them a convenient option for traders looking to adjust their portfolios quickly.

• Historical Stability:

Metals, particularly gold, have maintained their value over time, making them a reliable investment option.

• Potential For High Returns:

While there is no guarantee of high returns, metals have the potential for significant price appreciation, especially during economic uncertainty.