(May 20, 2011) The performance of base metals is a very reliable way to measure economic activity around the world. Whereas precious metals are stored up and held for investment, base metals prices are movers and shakers of overall economy because these are the actual inputs used in manufacturing, construction and production

  Base Metals and Price Movement
Metal prices are mainly controlled by consumer requirement for the products that they are inputs for.  Let’s take the price of steel as an example. Hot-rolled coiled steel headed northwards prior to the financial crisis of 2008, attaining its peak in 2004 when global economies were thriving. During that time, new buildings, cars and many other products were fuelling up the price up until 2004, and then demand leveled off or started to decline slowly.  Eventually, steel fell off of the cliff in early 2009, as demand for the products and the metal itself faded. Simultaneously, as metals ‘ demand is interlinked to each other, the global economy also witnessed  iron ore, copper and aluminum taking similar hammering in the face of dropping production and, consequently, dropping demand.

Investors who wish to know where global economies are heading must keep an eye on base metals. Base metals are an accurate indicator for signaling economic growth. They are followed by many professional traders as a leading economic indicator.  Some of the best investors in fact closely watch copper, steel and aluminum indexes to judge the enthusiasm of consumers around the world. Accordingly to many investors, several base metals tend to move downwards long before the data signals a weakness in the global economy.

Besides, the demand for base metals during times of economic ambiguity can tell you a lot about the economy all together. For instance, high demand during tough economic times indicates that both business and consumer confidence remains high. Low demand results in falling prices and is a precursor of panic in the marketplace. Investor hunger for these hard metals wanes during economic slowdowns, just as it does for producers. However, this decline has a boundary, as deteriorating supplies and/or shortage fears, however temporary, help to sustain the prices of base metals as stockpiling fuels up the demand.

 Also, it is important to note down the fact that base metal production and demand nearly have a perfectly proportioned relationship. As demand for base metals increases, metal producers push up the level of production. As a result, the overflow of supply on the open market ultimately leads to a decline in metals prices as supply is more than the demand. Metals prices attain their highest point when three factors line up to alter the balance between supply and demand. This is when the supplies of metals are stretched, and demand is buoyant and production is already at or near full capacity.