Mar 30, 2012, 07.25 PM | Source: Moneycontrol.com
Geojit Comtrade has come out with its report on Lead and Zinc.
, Geofin Comtrade |
The narrowing of the spread between the two metals is opening up opportunities for investment. In the analysis, a total of 563 data points are taken ranging June 2010 till this date with a Mean of 5.88 and standard deviation of 5.07. This high standard deviation is an indication that the data points are spread out over a large range of values and suggest unpredictability. Based on the data points during the past 2 years, the spread has hang on to a range of (0 to 10) 372 times of total 563 counts i.e. 66 percent opportunity. The range (10 to 20) has presented 22 percent prospect in last two years. However, momentous widening and tapering in the metal prices cannot be ruled out, with spreads touching highs and lows of 34.50 and -12.55 in 2008.
The current market picture is showing Lead Mini March futures trading at 101.10 and Zinc Mini March at 102.10 as on 28th March with a price difference of -1. The current weakness in both Zinc and Lead is likely to continue in wake of faltering demand from the largest consumer China but economic recovery in the U.S could support this fall in prices. Also, the debt crisis in the Euro region is showing signs of easing, after the Greek debt deal was paved through and the European central banks Long term refinancing Operation (LTRO). The growing optimism in the U.S economic recuperation and dwindling debt fears in Europe is more likely to uphold.
Lead and Zinc prices from falling further. In terms of Emerging economies like India and China, the demand for raw material would regain strength, if the inflation in these economies is brought under control which could open up room for further monetary easing by the central banks spurring growth. The current spread is -1 and in coming days expect the difference to oscillate between -2/+2. Looking ahead, the spread is likely to widen towards 6 if it is able to sustain above 2, which could open up room for further upside widening towards 12. The spread statistically is more likely to widen towards 18 on a thrust past 12.
However, an initial dip towards -2/-3 cannot be ruled out and this correction could be an opportunity to drive home the advantage. In terms of possibilities for spread to widen from the current level there exit 5 cases: Lead and Zinc prices to rise but Lead prices leading the way. Lead and Zinc prices to fall but zinc falling more. Lead stays at same level while zinc falls. Lead rise while zinc stays at same level. Lead rise but zinc falls.
To wrap up, based on fundamental analysis the downtrend for prices is likely to continue owing to supply demand constraints discuss earlier, but looking into the near term with the U.S economy on track of recovery, Euro zone withstanding the debt crisis and a possible monetary respite by the central banks in both India and China could back up prices on an uptrend. We expect both Lead and Zinc prices to rise gradually with Lead leading price race against Zinc. Therefore, it would be advisable to enter market when spread breaks past 2 targeting difference of 6 and a broad widening towards 12 with a stop loss below -2.
Trading Strategy: (Buy Lead, Sell Zinc)
Buy when spread above 2 Target 6 with a stop loss below -2
Buy when spread above 6 Target 12-16.
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