It’s important for zinc-focused investors to understand the basics of the zinc spot price and zinc futures.
The zinc market may have had a few rough patches in recent years, but supply disruptions and economic recovery promise to spur a revival for the zinc spot price and zinc futures.
With that in mind, it's worthwhile for investors interested in zinc to understand how zinc pricing works. Here's a brief overview of what investors need to know about the zinc spot price and zinc futures.
What is the zinc spot price?
InvestingAnswers defines "spot price" as "the current market price at which an asset is bought or sold for immediate payment and delivery." Taking it further, Investopedia states that the spot price of a security, commodity or currency "perhaps has more importance in regard to the large derivatives markets."
That might sound complex, but InvestingAnswers simplifies the idea with an example, noting that on November 29, 2010, the spot price of gold was US$1,367.40 per ounce on the COMEX. "That was the price at which one ounce of gold could be purchased at that particular moment in time," notes the publication.
So what does all that information mean in terms of zinc? Put simply, the zinc spot price is the current price that zinc is being bought and sold for. Investors looking for that information often turn to Kitco, which publishes a 24 hour zinc spot price chart, as well as 30 day, 60 day, six month, one year and five year zinc spot price charts. These charts are a great resource for current and historical data on the price of zinc and its spot market.
The London Metal Exchange (LME) is also a good source for the zinc spot price, but unlike Kitco, the LME publishes zinc spot price information in US dollars per tonne, not US dollars per pound. It's worth noting that some of the LME's zinc market details are only accessible to those who log in to the site.
What about zinc futures?
An understanding of the zinc spot price would be incomplete without knowledge of zinc futures. Why? As InvestingAnswers notes, the spot price of a security is important in and of itself, but "becomes an even more important concept when it's viewed through the eyes of the US$3 trillion derivatives market." As a side note, today's derivatives market is worth much more than that.
A derivative is a contract whose value is derived from the performance of an underlying entity. Examples of derivatives include forwards, options and, of course, futures, which let buyers lock in a price that they commit to buying an asset at in the future. That's desirable because it allows investors to reduce risk.
The key concept to understand is that the spot price of a security refers to its current price, while the futures price of a security refers to its price at a future date. The two are connected because spot prices, along with the risk-free rate and the contract's time to maturity, are used to set futures prices.
In terms of how that all relates to zinc, the Options Guide notes that investors interested in zinc can trade zinc futures on the LME under the contract code ZS in lots of 25 tonnes. The physical specifications for these lots call for zinc at a minimum of 99.995 percent purity conforming to BS EN 1179:2003.
As mentioned, futures trading allows investors to manage risk. Another article on the Options Guide explains how that works using the following chart:
Long zinc futures strategy.
In the scenario displayed, the zinc price moved only 10 percent, yet the return on investment was 61 percent.
According to the publication, "This leverage was made possible by the relatively low margin (approximately 17 percent) required to control a large amount of zinc represented by each contract." Of course, leverage can work both ways, and it can be harmful for investors in adverse market conditions.
As can be seen, having some knowledge of the zinc spot price and zinc futures can be beneficial for investors interested in entering the zinc space. While stockpile supply concerns have been prevalent in the zinc market, some analysts believe that high annual benchmark treatment charges for miners will continue to remove higher-cost supply and support prices.
It will certainly be interesting to watch how the market develops and to see what profits can be made.
This is an updated version of an article first published by the Investing News Network in 2016.
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Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.