Metals derivatives can be used when a mine wants to fix a future selling price, or when a fabricator that uses metal as a raw material wants to fix its purchase cost.

An example: a copper mine fixes its selling price with a forward

Metals divide into precious metals (gold, silver, platinum, palladium) and base metals (copper, aluminum, nickel, zinc, tin, lead)1. The example below uses copper, a base metal.

Consider a hypothetical example in which V Co., which owns a copper mine, plans to sell 1,000 tonnes of copper to a customer in 3 months at the market price at that time. V Co. has entered into a forward with a dealer to sell 1,000 tonnes of copper in 3 months at USD 10,000 per tonne. The forward is cash-settled: at maturity no copper changes hands, and only the difference from USD 10,000 is paid and received.

CustomerCopper buyerV Co.Copper mineDealerForward1,000 t copperMarket paymentGap if higherGap if lower
Figure 1Cash flows of V Co.'s copper sale and forward
Figure description

V Co. delivers 1,000 tonnes of copper to the customer and receives payment at the market price at that time. Separately, V Co. has a forward with the dealer at USD 10,000 per tonne. If the market price at maturity is above USD 10,000, V Co. pays the difference to the dealer. If it is below, the dealer pays the difference to V Co. The sale proceeds and the forward difference together make up V Co.'s proceeds.

If the market price in 3 months rises to USD 12,000 per tonne, V Co.'s sale proceeds are USD 12 million. On the forward, V Co. pays the dealer USD 2 million, which is (12,000 − 10,000) × 1,000 tonnes in USD, so its net proceeds are USD 10 million. If the market price falls to USD 8,000, the sale proceeds drop to USD 8 million, but V Co. receives USD 2 million on the forward, and its net proceeds are again USD 10 million2.

Market price in 3 months (USD per tonne) Sale proceeds (USD million) Forward gain or loss (USD million) Net proceeds (USD million)
12,000 12 −2 10
10,000 10 0 10
8,000 8 2 10
−3,000−2,000−1,0000+1,000+2,000+3,00010,000Profit/loss (dollars)Market price in 3 months (dollars)ProfitLossBreakeven 10,000
Figure 2Profit and loss of a forward to sell copper at USD 10,000 per tonne
Figure description

This is the profit and loss per tonne for the side that sells copper at USD 10,000 per tonne and holds the forward to maturity. It is zero when the market price is USD 10,000, a loss when the price is higher and a profit when it is lower. At a market price of USD 12,000 the loss is USD 2,000 per tonne, and at USD 8,000 the profit is USD 2,000 per tonne. For V Co., this profit and loss offsets the change in the copper sale proceeds.

Net proceeds do not change in this example because the quantity of copper to be sold and the quantity of the forward are both 1,000 tonnes, and both the sale proceeds and the forward difference are set by the same market price. V Co. protects itself against a fall in price, but the gain from a rise is offset by the loss on the forward, so a higher price does not increase its net proceeds.

Precious metals and base metals differ

A paper by the Bank of Japan Institute for Monetary and Economic Studies describes precious metals as having more of the character of a financial asset than of a consumable commodity. In the research it presents, gold and silver futures prices remained in contango, with later maturities priced higher, from 1990 to 2003. The convenience yield, the benefit of simply holding the physical metal, was also small, and the estimate for gold was zero. The paper considers the causes to be a developed lease market for precious metals, storage costs lower than those of crude oil or copper, and physical metal that does not easily deteriorate3.

Uses differ as well. As the table below shows, gold is used mainly in jewelry, in holdings by central banks and others, and as investment in bars, while copper is used in construction and in electrical and electronic products. Precious metals also have industrial uses, however, and the largest use of platinum and palladium is in catalysts that clean automobile exhaust.

Metal Breakdown of uses Scope and date
Gold Jewelry 45%, central banks and other institutions 21%, bars 19%, official coins and medals and similar 7%, electrical and electronic 6%, other 1% World estimate excluding exchange-traded funds (ETFs) and similar. 20244.
Copper Building construction 42%, electrical and electronic products 23%, transportation equipment 18%, consumer and general products 10%, industrial machinery and equipment 7% Copper and copper alloy products in the United States, according to a copper industry association5.
Platinum Autocatalysts more than 40% of world demand 20166.
Palladium Autocatalysts more than 84% of world demand 20166.

Where metals trade: exchange futures and over-the-counter forwards

Metals trade either as exchange-traded futures or as forwards and physical trades that the parties enter into directly with each other. For exchange-traded commodities, the quantity per contract, the place of delivery and the method of delivery are set for each product. In over-the-counter trades (including OTC derivatives), the parties can set the terms of the contract freely, and trading houses, financial institutions and brokers are often the counterparties7.

In Japan, Gold Standard Futures are listed on the Osaka Exchange. The standard product is gold bullion of at least 99.99% purity, and one contract is 1 kg. The six nearest contract months among February, April, June, August, October and December are traded, and holding a contract to expiry results in physical delivery. Trading in these futures began in 1982, and they moved from the Tokyo Commodity Exchange to the Osaka Exchange on July 27, 20208.

In the over-the-counter precious metals market, members trade directly with one another and with customers. Credit risk remains between the two parties. A dealer quotes a price for the quantity, quality, delivery date and delivery location the customer asks for. London is the center of the world over-the-counter market. For example, even when an Australian bank trades with a South African mining company, the metal is in most cases settled on accounts in London10.

A holding of metal in an over-the-counter trade and a futures position on an exchange can often be exchanged for each other, and this exchange is called an EFP (Exchange for Physical). Whether the exchange is possible depends on the law and on exchange requirements. The price difference at the time of the exchange varies with the number of days to the delivery date, currency and metal interest rates, the cost of moving the metal, and the cost of matching purity and bar size11. How futures prices are determined, contango and backwardation, and the difference between delivery settlement and cash settlement are covered in Overview of Commodity Derivatives.

Factors that move prices differ by metal

The World Bank's April 2026 outlook explains the factors that moved metal prices in the first quarter of 2026 (January to March), separately for base metals and precious metals. For base metals, industrial demand and supply constraints at mines and in exports are central, and for precious metals, investor flows and safe-haven demand are central12.

For base metals, on the demand side, renewable energy, power grids and data centers supported prices. Demand from construction remained weak, partly because of the slump in China's real estate sector. On the supply side, disruptions at major mines pushed copper prices up, disruptions to exports from the Middle East pushed aluminum prices up, and a rise in global inventories pushed lead prices down.

Among precious metals, gold prices were supported by safe-haven demand, speculative demand, inflows into ETFs and purchases by central banks. Recycled gold (gold that is reused) accounts for nearly 30% of gold supply. Silver and platinum also have industrial demand.

According to the same outlook, compared with the previous quarter, the price index for metals as a whole rose 13% in the first quarter of 2026, copper rose 15%, aluminum rose 13% and gold rose 17%. Gold prices fell toward April, as speculative buying was unwound amid changes in the interest rate outlook and moves in the dollar. When interest rates rise, the opportunity cost of holding precious metals, which pay no interest, becomes higher, so a rise in interest rates can push precious metal prices down12.

Lending of precious metals and forward prices

Precious metals have interest rates. A lender of metal seeks a return on its holdings, and borrowers have various purposes, such as a mine that wants to hedge the price of future production or an industrial company that uses platinum or palladium to make catalysts. The lender bears the credit risk of the borrower on the full amount of the metal lent. When the metal price moves up or down, its value in the currency moves with it13.

Central banks also sometimes lend gold and other metals. Gold deposited as specific bars, once lent, is no longer a share of specific bars, and what comes back is different bars13.

Forwards and swaps that exchange metal for currency limit the credit risk on principal more than lending does, so day-to-day trading uses them. Two interest rates are involved, the currency rate and the metal rate, and the precious metals market quotes the forward price as the currency interest rate minus the metal interest rate. As an illustration, the LBMA gives an example in which a dollar borrowing rate of 10% and a gold lending rate of 3% give a 1-year swap rate of 10% − 3% = 7%. It notes that the example is far from actual interest rates.

Prorating this 7% by the number of days and adding it to the spot price gives the 1-year forward price. In the same example, gold with a spot price of USD 1,200 per ounce has a 1-year forward price of about USD 1,285 (1,200 + 1,200 × 7% ÷ 360 × 365)13.

For base metals and foreign exchange, the forward price is quoted as "points" added to the spot price. The precious metals market does not use this form13.

How mines and fabricators use metals

Metal producers and companies that use metals as raw materials use forwards and futures to prepare for price changes. The paper by the Bank of Japan Institute for Monetary and Economic Studies explains that companies increasingly need commodity futures and forwards to hedge price changes in raw materials and products14.

V Co., the seller, fixes its selling price in advance, as in the V Co. copper example. The same mechanism works for a buyer. Consider a hypothetical example in which a fabricator that uses copper as a raw material plans to buy 1,000 tonnes of copper at the market price in 3 months, and has entered into a forward to buy at USD 10,000 per tonne. If the market price falls to USD 8,000, the purchase cost is USD 8 million, but the fabricator pays USD 2 million on the forward, so its combined cost is USD 10 million. If the price rises to USD 12,000, the purchase cost is USD 12 million, but the fabricator receives USD 2 million on the forward, so its combined cost is again USD 10 million. The buyer likewise gives up the chance to buy at a lower price in return for fixing its purchase price.

Risks: price changes, counterparties and specification differences

A buyer of futures incurs a loss when the price falls, and a seller incurs a loss when the price rises. Price changes can be large. In the first quarter of 2026, gold price volatility reached its highest level in decades, amid a buildup and unwinding of speculative buying12. The mechanism of daily settlement of gains and losses, marking to market, and of margin is explained in Futures Margin and Daily Settlement. The margin for Osaka Exchange Gold Standard Futures is calculated by the VaR method8.

In over-the-counter trading of precious metals, credit risk remains between the two parties to the trade10.

Exchange-traded futures and London over-the-counter gold can differ in purity, bar size and place of delivery, and when positions are exchanged, the cost of those differences enters the price difference11.

Notes

  1. Bank of Japan Institute for Monetary and Economic Studies, "コモディティ価格変動の特徴とプライシング・モデルの展開" (Characteristics of Commodity Price Movements and Developments in Pricing Models, in Japanese), Monetary and Economic Studies, April 2010, section 2(1) "Overview of the commodity market", Table 1 "Examples of commodity trading on commodity exchanges" (p. 29). ↩

  2. The calculation does not include fees, counterparty credit risk, or any difference between the actual sale price and the reference price of the forward. ↩

  3. The same paper, section (4) "Precious metals" (p. 66), and its note 53. That gold and silver futures curves remained in contango from 1990 to 2003 and that the estimated convenience yield for gold was zero are results of the analysis by Casassus and Collin-Dufresne (2005), which the paper introduces. The causes are given in note 53, which words them as "considered to be" the causes. ↩

  4. U.S. Geological Survey, "Mineral Commodity Summaries 2025", Gold (January 2025), opening paragraph of page 2. This is an estimate of world consumption in 2024, excluding ETFs and similar investments. ↩

  5. U.S. Geological Survey, "Mineral Commodity Summaries 2025", Copper, "Domestic Production and Use" paragraph (quoting material from the copper industry association, the Copper Development Association). ↩

  6. London Bullion Market Association, "A Guide to the Loco London Precious Metals Market", "19. Key Facts about Precious Metals", the Platinum and Palladium entries (2016 Johnson Matthey statistics). ↩ ↩2

  7. Bank of Japan Institute for Monetary and Economic Studies, "コモディティ価格変動の特徴とプライシング・モデルの展開" (in Japanese), section 2(1) "Overview of the commodity market", second paragraph (p. 29). ↩

  8. Osaka Exchange, "制度概要（金標準先物）" (Outline of the system: Gold Standard Futures, in Japanese; updated April 13, 2026), the items on standard product, trading start date, contract months, last trading day, trading unit, delivery price, delivery date and time, delivery method, margin and settlement method. ↩ ↩2 ↩3

  9. Japan Securities Clearing Corporation, "JSCCとは" (About JSCC, in Japanese), "沿革" (History) and "「清算機関」の機能" (Functions of a clearing organization). JSCC is a financial instruments clearing organization, and on July 27, 2020, through its merger with Japan Commodity Clearing House, it began clearing listed commodity derivatives. An institution that becomes the counterparty to the trades of multiple market participants and guarantees performance of settlement is called a central counterparty (CCP). ↩

  10. London Bullion Market Association, "A Guide to the Loco London Precious Metals Market", "Introduction", the paragraphs "Over The Counter (OTC)" and "Metals Clear London". ↩ ↩2

  11. London Bullion Market Association, "A Guide to the Loco London Precious Metals Market", "13. Futures Markets and Exchange Traded Products", the "Futures Markets" paragraph. ↩ ↩2

  12. World Bank, "Commodity Markets Outlook, April 2026", "Metals and minerals" (pp. 36–37) and "Precious metals" (pp. 41–43). ↩ ↩2 ↩3

  13. London Bullion Market Association, "A Guide to the Loco London Precious Metals Market", "9. Lending and Borrowing Metal", "Deposits and Leases", "Lending Allocated Metal" and "Forwards". ↩ ↩2 ↩3 ↩4

  14. Bank of Japan Institute for Monetary and Economic Studies, "コモディティ価格変動の特徴とプライシング・モデルの展開" (in Japanese), "1. Introduction" (p. 28). ↩