The Simplest Way to Manage Metals Price Risk and Reduce Costs

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Simple strategies are usually overlooked. However, in most cases, the simpler and easier it is to understand a strategy, the better the strategy works out.

First, let us guess what your current strategy is:

  • You buy forward when you sense prices will rise or when the subjective forecasts your company is subscribed to is bullish.
  • You buy down the market when you sense prices will fall or when your forecasts are bearish.

How much you lock in or leave on the table depends on your company’s risk tolerance. Your strategy is not very consistent and its performance is kind of hard to track. Sometimes you didn’t hedge enough when you should have, and sometimes you regretted hedging after you saw prices actually fall. Your company most likely got caught in the recession of 2008.

Are we close? If not, you should feel special, because that is how most companies buy.

The next strategy is pretty simple and it’s based on the idea of following trends.

The idea is that trends are likely to remain in motion until they break and a new trend starts. Many successful traders implement these kinds of strategies and metal buyers can easily use them.

You don’t need to guess when and how much the price is going to increase or decrease. You don’t need to try to anticipate market moves. The idea is to consistently react to market signals following two simple rules:

  • Increase your hedging positions when prices are rising and breaking resistance levels (green lines)
  • Reduce your hedging positions when prices are falling and breaking support levels (red lines)
Comex copper price since 2000. Created with stockcharts.com

Comex copper price since 2000. Created with stockcharts.com

The graph above shows how this strategy would have worked with copper since the year 2000.

  • Level 1 shows how the copper price rose above previous resistance levels at the end of 2003. The green arrow signals the time to start increasing hedging positions.
  • The first arrow in level 2 at the end of 2006 signaled the end of the uptrend. The buyer would start reducing hedging positions. The second arrow, at an early stage of the recession, was another signal to buy down the market.
  • The arrow in level 3 suggests to start taking long positions again.
  • In mid-2011, the arrow in level 4 warns the buyer to reduce hedging positions and keep buying down the market until today, when we are still waiting for a new signal.

This example can be applied to any metal. Although this represents a long-term view, the same strategy can be applied to a shorter time frame. If you have trouble identifying trends or simply you don’t have time for this, we would be happy to help you out!

Read more from Raul de Frutos.

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