Around one-third of zinc produced is used to galvanize other metals such as steel and iron. However, zinc has many other important applications making it of interest to commodity traders.
Investors might consider trading zinc for the following reasons:
- Bet on Strong Global Economy
- Inflation and Weak US Dollar Hedge
- Portfolio Diversification
Read on to learn more about these reasons, or skip ahead to learn how and where to get started trading zinc.
Betting on Strong Global Economy
Expanding global demand for galvanized steel, zinc alloys, diecasts and other zinc products could push prices higher.
For this scenario to occur, China would have to resume its strong growth. The Chinese economy has experienced a slowdown in recent years, although some signs suggest that the economy is strengthening again. Essentially, investing in zinc is a bet on a resurging Chinese economy.
A growing US economy could be another catalyst for higher zinc prices. Demand for galvanized steel for infrastructure projects and in the US automobile industry could be the catalyst for higher prices.
How is Zinc an Inflation and Weak US Dollar Hedge?
Investing in zinc is a way to bet on a weak US dollar and higher inflation.
Zinc is priced in US dollars, so the performance of the American economy can impact its price. The US Federal Reserve Bank has kept interest rates low and the US dollar weak for many years.
US central bankers are likely to continue these policies to support consumer borrowing and spending. These conditions are likely to be very beneficial for base metal prices.
A weak dollar could stoke inflation concerns. There is a limited supply of zinc, and producing it is an energy-intensive endeavor. The price of the commodity would likely benefit from fears of inflation.
Diversify Your Portfolio
Most traders have the vast majority of their assets in stocks and bonds. Commodities such as zinc provide traders with a way to diversify and reduce overall portfolio risk.
Should I Invest in Zinc?
Zinc traders might consider purchasing the commodity as part of a basket of commodities that includes other base metals (i.e., copper, lead, nickel, and tin), precious metals, agricultural commodities (i.e., dairy, meats and grains) and energy.
Purchasing a basket of commodities helps protect traders from the volatility of any individual commodity. It also adds overall diversification to a stock and bond portfolio.
There are three specific trends that could raise zinc prices in the years ahead:
- Chinese Demand
- Infrastructure Demand
- Mining Challenges
China is the top consumer of zinc, and demand should grow if the Chinese economy rebounds.
The United States is expected to embark on major infrastructure projects over the next several years. Bridges, railways, airports and other projects require major upgrades. All of these projects will require significant amounts of galvanized steel. Zinc prices could benefit if these projects come to fruition.
Higher energy costs and pollution concerns make mining an increasingly challenging business. As fuel and electricity costs rise and China implements emission standards, more mining operations could close or consolidate. This could produce higher zinc prices.
However, traders should also consider the risks of investing in zinc:
- A global recession could weaken Chinese demand.
- Abandonment of infrastructure projects in China or the United States could depress demand for zinc.
- Higher US interest rates and a stronger dollar could weaken commodity prices in general.
How Can I Invest in Zinc?
Investors have several ways to gain exposure to zinc prices:
Zinc Trading and Investing Methods Compared
|Method of Investing||Complexity Rating (1= easy, 5 = hard)||Storage Costs?||Expiration Dates?||Management Costs?||Leverage?||Regulated Exchange?|
Physical zinc bullion such as ingots is the most direct way to invest in zinc. However, investing in bullion requires a secure storage facility.
Ultimately, the cost of this storage and the low value-to-weight ratio could make holding physical zinc an impractical proposition.
The Chicago Mercantile Exchange (CME) offers a contract on zinc that settles into 25 metric tons.
The contracts trade globally on the CME Globex electronic trading platform and have a variety of expiration months.
Futures are a derivative instrument through which traders make leveraged bets on commodity prices. If prices decline, traders must deposit additional margin in order to maintain their positions. At expiration, the contracts are physically settled by delivery of zinc.
Investing in futures requires a high level of sophistication since factors such as storage costs and interest rates affect pricing.
These financial instruments trade as shares on exchanges in the same way that stocks do. ETFS Zinc (LN: ZINC) is an exchange-traded commodity that tracks the Bloomberg Zinc Total Return (previously DJ-UBS) Index.
|Bloomberg Zinc Total Return|
Shares of Zinc Companies
There are many publicly traded companies that have some exposure to zinc prices. While investing in companies can be a leveraged way to gain exposure to zinc prices, many of these companies have significant exposure to other metals and commodities prices.
In addition, factors such as company management and the overall stock market can also affect these investments:
CFDs allow traders to speculate on the price of zinc. The value of a CFD is the difference between the price of zinc at the time of purchase and its current price.
Some regulated brokers worldwide offer CFDs on zinc. Customers deposit funds with the broker, which serve as margin.
The advantage of CFDs is that traders can have exposure to zinc prices without having to purchase shares, ETFs, futures or options.
Where Can You Trade Zinc?
If you are looking to get started trading zinc futures, and related CFDs, here’s a list of regulated options available in to consider.
Zinc and Metal Brokers Available in
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 73.0%-89.0% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
What Do the Experts Think About Zinc?
Zinc prices have shown recent strength, but one analyst is skeptical about the sustainability of higher prices. She believes increases in supply and the likelihood that buyers will substitute other commodities for zinc could cause the rally to stall:
Zinc supply is slowly coming back and the greater length of time zinc displays a large price disparity to aluminum the more likely we’ll see substitution.
Macquarie analyst Vivienne Lloyd
However, another leading analyst believes that prices could remain high for a longer period of time:
Prices will stay elevated because we have a market deficit that requires inventory drawdown. New supply and demand destruction due to zinc substitution will eventually rebalance the market, but that could take months, if not years.
Societe Generale analyst Robin Bhar