We live in an age where people are more detached from primary production than ever before. With this detachment from production a conceptual detachment has formed for many people when asking questions about the values of things. I'd like to talk about what makes metals valuable, but first:

What is value?

The most obvious way in which something can be valued is by looking at what other people will pay for things. This however comes with some major downsides, like the notion of value being tied to the whims of the crowd. While generally speaking the crowd can form a consensus position on the value of things, the behavior of a crowd is neither necessarily correct or stable.

We saw an example of this with the non-fungible tokens (NFT) craze. This was a classic example of an economic bubble that was driven by extreme hype and greed. What makes NFT's such a fascinating example is that there is close to zero intrinsic value to these financial products. A NFT is only worth what someone else will pay for it, no other value can be derived from one other than as it pertains to a financial transaction. Much of that financial transaction is predicated entirely on the idea that the NFT has some form of scarcity to it.

This is quite unlike most other things as most other things have some sort of intrinsic value to them. For example a collectable guitar might have value because of scarcity and a market where people are willing to buy them, but even if nobody is willing to buy or sell them those guitars still can be used to make music. Value can be created by these independently of there being a financial transaction to buy and sell them. Most things are like this, but most people don't think of things in this way.

Liquidity is the notion that you are able to buy and sell an item rather quickly. A highly liquid market is one where there are buyers and sellers, the asking price and the bidding price are not too far apart so transactions can be made.

Liquidity is different in many important respects from value but it nonetheless impacts the value of an item because it changes the risk profile for investing in those items. Take for example a painting like the Mona Lisa. This could potentially sell for an extremely large amount of money, but the marketplace for similar works does not have all that many buyers or sellers. This marketplace is far less liquid than say the marketplace for government treasury bonds where an enormous number are sold every day. Even if the Mona Lisa couldn't be sold on the spot nobody would suggest it had no value, importantly if the price were sufficiently dropped it could be sold very quickly. Investing into illiquid markets carries the risk that offloading your position will become hard because there will not be enough buyers to buy your position out when you want to sell. This is an issue in many private equity deals. This is also an issue with many stocks because selling a large amount of a stock will put downwards pressure on the price of that stock if you try to sell it all at once. This is why many people in the finance industry do many things to generate exit-liquidity, for example Jim Cramer's real job could potentially just be to spruik exit liquidity. Many financial advisors give "advice" is so consistently negative ROI in the short term¹ due to a conflict of interest where the sell side pays them to spruik the positions they want to sell. While unethical this is highly lucrative because creating more liquidity when selling will allow you to sell more of your position for a higher price than you otherwise could get for it.

Scarcity

In the modern world we often can see airplanes in the sky, wrap food before baking it with alfoil, drink a drink that was contained in an aluminium can. This is not to mention all the other times we encounter a light weight metals that are alloyed with aluminium that we don't even stop to think about. But this situation was not always so.

There's a story about the Napoleon III of France from the early 1800s impressing guests with a very exotic set of dinnerware. When entertaining guests they served food on the most expensive of plates for that time.

That dinnerware was made of aluminium².

The Washington Monument was built with a metal cap that was at the time the largest single piece of aluminium in the world weighing in at 100 ounces or 2.83kg. The choice of material for the apex was chosen to show wealth and prestige:

https://upload.wikimedia.org/wikipedia/commons/thumb/3/35/aluminium_apex_Repaired_1934.png/588px-aluminium_apex_Repaired_1934.png

picture source

Despite being one of the the most common metals on the planet in various ores elemental aluminium doesn't exist in pure form anywhere so it has to be refined. In 1885 refining this metal was incredibly expensive compared to now.

At the time the monument was being made in 1884 the wages for a laborer were $1 per day and the price of aluminium was $1/ounce in 1884 dollars. So the capstone was 100 days of wages in real terms.

You may have noticed that some of the top of this pyramid had changed, this is the result of lightning strikes hitting it over the years. Lightning is extremely high amperage electricity and this interaction with the aluminium is a hint at how electricity is used in the modern refining process.

Modern aluminium is far cheaper to produce because the invention of a method of production that utilizes electrical energy to refine.

Even if this method was known in the 1800s there wasn't cheap access to electricity back then. The highest amperage that people tend to encounter in their day to day life is in the starter engine in their internal combustion engine cars approx 300A or the electric engine maxing out in an electric car. Making aluminium from cryolite takes more like 300KA or more in a big industrial plant, which is multiple orders of magnitude more than in the car. People sometimes refer to aluminium as "solid form electricity", as the embodied electricity and the associated costs of that electricity are high. This is why to this day aluminium is particularly profitable to recycle, it is extremely expensive to refine from raw materials but is comparatively rather cheap to melt down and recycle.

It's the knowledge combined with the greatly improved access to electrical energy available in the modern world that has allowed the price to drop. The lower price has driven consumption higher, as per Jevon's Paradox, a phenomena we see with most industrial commodities that are useful in a broad range of areas.

If demand is higher than supply this will tend to drive up prices. There's elements that are extremely rare but yet would have almost no buyers. In the extreme case of synthetically created elements you might not ever have a buyer because the radioactive decay is so fast that no economic transaction could be made before the element decayed into another element.

Osmium - a scarcity example

A while ago I had someone ask me if pure osmium was an element that would be worth getting some of for an investment. The reasoning given to me was that "it's not mined in large quantities and it's fairly dense which could make it easy to store and it belongs to the platinum group of metals". While it is a platinum group metal it isn't as desired as the others for investing in. Let's start with the mining data, we can see that it's not mined in a whole lot of places. There was even a mining boom for one of the alloys in Tasmania.

But there are a number of reasons why this isn't a popular investment in its elemental form. The first reason is that the oxide it creates \(OsO4\) is highly toxic. This oxide forms in air at standard temperatures and so storing it would require the ability to work with highly toxic materials. Dealing with toxic materials is something that is highly risky and to de-risk is a massive pain in the ass. For example to prevent oxides from developing you need could creating an inert atmosphere. But this is something most people don't know how to do and the people who have these skills are expensive to hire and the work they will need to do will also be expensive. Osmium in alloys is a lot less dangerous because the oxide can't form, which is why you can sometimes find the element in alloys in materials that require hardness. For example the alloy osmiridium is used in the tip of some fountain point pens, where the extreme hardness is a valuable property.

The issue is that storing a metal in an alloy then means that you have to do refining work if you want to get the pure elements back out again to use in other alloys. Other platinum group metals end up being a lot better investments for this reason (since they can safely be stored in elemental form), but more on those in an upcoming article.

Despite all these annoyances osmium is used in a variety of niche applications because the chemical properties are just right for a variety of specific uses. You'll see this pattern in many industrial applications, there's highly dangerous materials that are used because they make economically important products and safer substitutes just don't exist.

One of the things that hopefully this example makes clear is that scarcity alone won't make a metal a good investment, it needs to have some uses to unlock the value from the scarcity. Basically low supply doesn't make something valuable if there's low demand.

Industrial uses

The modern world uses a huge number of metals in a huge number of applications.

As is the case with modern economies there's a lot of different supply chains. No individual can keep up with the multitude of uses, there's just too many.

I remember when I was at high school I encountered a true midwit teacher, he made this comment that "we have all this pollution with single use plastics, we could replace all plastics with metals and save the waste". At the time I knew this to not be true, since the chemical properties of plastics are different from those in metal, I pushed him on this a bit and he was convinced all plastics could be substituted with other materials. This is one of those statements that might sound appealing on face value but is entirely incorrect. Sure things like containers that you store food in could be made of non-plastics materials (and maybe should be due to various different issues that plastics leaching into food cause), but generalizing this to all processes that require materials is an extrapolation that takes you further away from the truth. There's very specific chemical processes that require that we use metals and others that require the use of plastics and others that need ceramics or other materials entirely.

Take for example piping, in many cases we use concrete or PVC piping for things like sewers. There's reasons why we can't use metals in some applications. There's issues like corrosion and electrolysis that exist with metals but not those other materials. On the other hand it's unlikely that we would make a high temperature furnace out of plastics since high temperature burning of plastics creates all sorts of especially nasty byproducts.

In modern chemical process engineering we have a huge number of processes that require very specific feedstock materials and very specific materials for creating the equipment that processes them. In many cases these processes are set up for the highest economic value that can be generated, and to generate this value requires using certain materials. In other cases there simply are no alternatives so using a material might be the difference between something being possible to make or not.

Monetary demand

If a metal has monetary demand we can call it a precious metal. This demand has a profound impact on how such a metal is valued, more about this in the next article.