LME Metals Basket Strategy

A basket provides diversification - if one metal moves against you due to specific factors (nickel shortage, tin surplus), other metals may offset. You capture the overall sector move while reducing single-metal risk. The basket has lower volatility than individual metals.

A full LME basket has 6 positions (Copper, Aluminium, Zinc, Nickel, Lead, Tin). You can start with a simpler 3-4 metal basket (Cu, Al, Zn, Ni) to reduce complexity. Each position needs monitoring and has its own stop loss.

London session (6 PM - 2 AM AEST) has best liquidity for LME metals. Execute all basket positions within the same session for consistency. Asian session sees China-related moves that may affect your basket.

With 3% basket risk and 6 positions, you need enough capital to open meaningful positions. A minimum of A$20,000-30,000 is recommended. With A$50,000, your 3% risk is A$1,500 split across 6 metals.

Yes, equal weighting (16.67% each) is a valid simple approach. However, it ignores that copper and aluminium are more liquid and economically important. Custom weights (Cu 30%, Al 25%, etc.) better reflect market reality.

Minor divergence (one metal flat while others rise) is acceptable - it may catch up. Major divergence (one metal sharply down while others up) may warrant closing that specific position. If 3+ metals reverse, consider closing the entire basket.

No. Use a 5% drift threshold with monthly review. Rebalancing too frequently incurs transaction costs and may generate taxable events. Only rebalance when weights have materially drifted from targets.

When correlations spike (risk-off events), all metals move together and diversification benefit disappears. During high correlation periods, your basket behaves like a single concentrated position. Reduce size by ~25% when correlations exceed 0.9.

For systematic approach: Enter when 4+ of 6 metals are above their 50 EMA. For macro approach: Enter on China stimulus announcements or when Global Manufacturing PMI turns above 50. Best signals combine both technical and macro.

All LME metals are priced in USD, creating negative correlation (~-0.4). Strong USD is a headwind for metals; weak USD is a tailwind. Check DXY trend before basket positioning - avoid long basket during strong USD rallies.

Use 5-10 years of daily data for all 6 metals. Calculate basket returns using target weights. Measure Sharpe ratio, max drawdown, and diversification ratio. Compare to single-metal approaches. Key: basket should have similar returns but lower volatility.

Inverse volatility weighting: Weight = (1/Metal Vol) / Sum(1/All Vols). This gives each metal equal risk contribution. Lower volatility metals (aluminium, lead) get higher weights; higher volatility (nickel, tin) get lower weights. Requires monthly recalculation.

Check your total metals exposure: ASX resources stocks + Super resources allocation + AUD income correlation. If significant, reduce LME basket size. Total metals shouldn't exceed 15% of portfolio. Many Australians are already overweight commodities.

Risk-off with USD strength is worst: Metals decline, correlations spike (reducing diversification), and USD headwind compounds losses. Exit or short basket in this regime. Signs: Rising VIX, falling PMIs, strong DXY, China growth concerns.

Core-satellite: 60% in standard basket, 40% tilted toward metals with strong signals. Or adjust weights ±10% based on RSI extremes, breakouts, or supply news. Maintain minimums (5%) and maximums (40%) to preserve diversification.