Talking Metals

Something that has caught my interest recently is the Metal's space. When it comes to "investment" in metals, be it through stocks or the physical metal itself there are a few things to consider. First you need to know why you are choosing to invest in a certain metal, be it a precious metal (gold, silver,etc) or more an industrial use (copper, aluminum). Are you looking to seek protection in the event of a currency crisis or economic collapse, or are you simply looking for diversification within your regular stock portfolios? This is an important question to know because it will make a difference in how/what you choose to invest in.

Physical Metal
If you are seeking protection against economic instability you will need to focus your attention to obtaining the physical coin/bullion. The theory is that whatever currency was previously in use (dollar bills for example) no longer have value because the backing for that value (US Treasury) has lost credibility.  This is what most people envision when investing in gold; the economy is going to melt down, it's going to be the end of the world as we know it and we will be bartering with gold and silver coins.

While the end of the world scenario is possible, I personally find it unlikely. That being said when you invest in physical precious metals you do so for insurance, "in case". The buying of physical coins should not be done so for trading purposes as commissions (spreads) are high when buying physical coin. Buying metal should be done for insurance against your dominant currency losing value. In the event some panic event does ensue, your silver and gold should have withheld their value if not risen significantly and you will have a way to trade effectively.

You can buy physical coins from a lot of places, just be sure that who you are dealing with has a strong reputation and has been doing business for many years. There is just something uneasy about mailing your money to some internet company and hoping they send you something (let alone genuine) in return. Find a reputable dealer and buy incrementally over time. Even if you only buy $100 at a time, slowly accumulate some shiny metal and pass it along to your kids. Start with silver as it is less expensive than gold; I personally like the .999 oz US Mint Silver Eagles which currently trade around $21/oz. Once you accumulate a good amount of that and you have more money to save you could then start to buy some gold. Gold is more expensive as currently it trades near $1370/oz. but when you can afford some it wouldn't be a terrible addition to your overall investment diversification. Keep it very safe though, I prefer a safety deposit box or personal safe. Safety deposit boxes are the best way to go as then nothing is kept on your person, has additional security and often insurance against loss.

Metal Stocks and ETFs
The other option for investing in metals can be done through stocks and Exchange Traded Funds (ETFs). You can buy mining stocks, specific industrial companies, or ETFs that track the spot price of an individual metal. This is how you want to "trade" metals and diversify risk within your investment accounts. These are all treated exactly like trading stocks, they have a ticker symbol and are easily bought and sold through any broker you may use. Just know that when you buy the GLD (the ETF that tracks spot gold prices) you are buying "paper gold" not physical bullion. If you are a "gold as insurance" investor, then this is not the strategy for you. Just because you own a GLD share does not entitle you to swap that share for physical metal, the GLD fund will tell you that you own paper gold, not actual gold. Your gold is just as good as your US Dollars...paper. And of no help in a real crisis.

But if you are looking to trade metals and just try to catch trends and momentum in supply an demand then stocks and ETFs are the way to go. What we want to do with these is treat them exactly like we would our stocks. We want to buy the out performers and avoid or sell the laggards. So let's take a look at the metals and a few stocks and see how they measure up...

These are the primary futures market metals and their prices can be followed 24 hours a day on Finviz Futures page. Here is a comparison chart showing the past 2-year performance of each of the 5 primary traded metals:

1. Palladium (white)
2. Gold (yellow)
3. Copper (orange)
4. Platinum (blue)
5. Silver (grey)

We like to buy strength and sell weakness. Looking at this list the clear leader over the past two years is Palladium. The most interesting thing to notice is how 4 out of the 5 metals all got crushed in sympathy during 2013, yet Palladium hardly budged and is now the only one making new multi-year highs. Lets take a closer look at Palladium as it is currently showing an incredibly favorable setup and breakout attempt.

PALL (Palladium ETF)

 You can see here that this is just about everything I could ask for when looking for a strong, positive setup. Price is breaking out of a multi-year coiling triangle formation and is attempting to take out early 2013's highs. Relative Strength vs the SP500 is also confirming the breakout, showing strong rotation into the group. Pretty simple here folks. If you are interested in diversifying your portfolio away from stocks and bonds to a more "market neutral" asset class, then metals could be right for you. And if you are buying metals, it certainly appears that Palladium is the metal of strength and risk/reward at the current time. I am long Palladium via PALL in my personal accounts.


Now lets say you would like some of the same commodity exposure but would prefer to do it through a company involved in the mining and manufacturing of a particular metal. In that case you could look to any number of companies that do just that. Here is a quick look at a few of the stocks I follow for that very purpose.

Freeport McMoran FCX (Copper/Gold Mining)

FCX is a large multi-national copper and gold miner. Unfortunately the combined overall weakness in Gold and Copper over the past few years has not been kind to the profits of Freeport and the stock is mostly directionless to down over the past two years. Relative Strength has not been in favor of higher prices here for much of this time either. There have been a couple trade able opportunities, but nothing major yet.

Here in lies the problem with mining stocks: they are tied to the performance of the metal itself AND they still offer headline risk outside of commodity related effects. They are still subject to quarterly profit targets and costs associated with running a business. So just because Gold is up on the day FCX could be trading lower due to any number of outside business/sector related factors.    

McEwin Mining MUX (Junior Gold/Silver Mining)

Here is a stock that I have followed from the beginning of my trading in the markets. This has been the stock that has caused me to lose more money than almost all my other trades combined; I have learned many lessons trading this stock unsuccessfully and it still finds a way to coerce me back into it. That being said, I am a much better trader for it due to my understanding of risk management and how following a story and ignoring price can get you into a whole lot of trouble. On top of that, the idea of trading with the trend has been fully reinforced after losing money trying to trade Long a down trending stock.

Lets take a look at the larger picture here to see what I mean:

It took me much longer than it should have to understand that it is best to trade with the primary trend. I basically got smoked for all of 2011 and finally threw in the towel after about the 6th forced entry into MUX right in the beginning of 2012. However I have been recently drawn back into the name as over the past few months prices have seemed to stop going lower (no more lower lows) and have begun to reverse (breaking above prior lower highs). Like I said above, I have learned an awful lot over the past few years and have finally put a winning trading system into practice. What's interesting is that this past few week's entry signal is the 1st "actual" confirmed signal from my system parameters and every other entry I made previously was against those same parameters. When you have a plan and stick to it, it works. When you don't have a plan and just try to make trades, it doesn't. This shows first hand how that can play out and having been involved in the entire process with MUX, I fully understand now what it takes to identify winning stocks (entry points) and how to avoid the more challenging setups out there.

Nucor Corp NUE (Steel/Iron Mining)

NUE has been in a solid uptrend over the past few years but as with all the mining stocks, is well off its all-time highs. The current Relative Strength has been lousy, but as mining stocks go, the current uptrend in price is better than most. Still I would like to see more from a Relative perspective before getting too aggressive here.

Alcoa AA (Aluminum Mining)

AA has been a joke of a stock since the 2008 market crash. However over the past 2 years it seems to have found a bottom and has recently gone nuts ripping nearly 80% off the lows back in October of last year. While this seems like it has gone too far too fast, take a look at the longer term view to get an idea of where we are by comparison:

As you can see, putting the recent surge in historical context shows that plenty of upside is possible in the future should things continue to move in a positive direction for Alcoa.

Most mining stocks have been obliterated since the market meltdown 6 years ago, and have traded lower with the weakness in the coinciding metals they mine and manufacture. Since the beginning of the year so far we have seen metals and mining stocks begin to show some life for the first time in a long time. It would behoove you to begin to poke around in this space as the upside could be fantastic.

Currently I am Long Palladium straight up via the ETF PALL and am Long MUX. But one could make the case that many of these groups and miners look very interesting from a long term valuation standpoint at these reduced levels. Its always a good idea to notice where there is a lot of investor hatred and scorn, especially when those areas begin to show signs of bottoming and beginning a new trend higher. That unwind of negative sentiment can be a very powerful thing and right now the metal and mining space in the market looks both hated and bottoming. I have begun to position toward this area recently and should it continue to show Relative Strength, I will continue to increase my exposure to those best positioned for a recovery rally.
However you choose to invest in metals, I think due to many factors, the current setups look favorable across many names and asset classes.