APEX FULL YEAR 2011: Deutsche Bank advises pair trading on metals

Deutsche Bank is advising clients to look at trading pairs of metals, instead of taking a single position, in order to mitigate risk as volatility in the global economy continues.

Deutsche Bank is advising clients to look at trading pairs of metals, instead of taking a single position, to mitigate risk as volatility in the global economy continues.

In a recent report, analysts at the bank recommended several pair trades, in which one metal is purchased and another is simultaneously sold.

“As the name implies, this is a trade idea – not fundamental research – that is only recommended to be executed in its entirety,” Deutsche Bank analysts said in the report.

As such, they said, the buy and sell parts of each trade might not line up with the analysts’ fundamental research stance on the metals on a stand-alone basis.

“It has become increasingly apparent that asset values are being determined, not by the normal forces of cyclicality or structural change, but by the chaotic vagaries of political decision-making,” the analysts added.

“In order to address the challenges that this represents to forecasting values for various asset classes, including metals markets, we have examined relative values for metal pairs within the sector.”

There is, however, still considerable uncertainty as to how pairs of metals will trade in future, they noted.

Deutsche Bank is advising long positions on platinum and gold, nickel and copper, and nickel and gold.

Each pair is positioned at the bottom of a range, according to the analysts, while the gold and platinum pairing marginally exceeds historical ranges.

“We would characterise the bias in this advised positioning as cyclical in nature. By this we mean that the pairs have normally moved towards their respective means during periods of economic expansion,” they said.

“The obvious question is whether the market, over the next several quarters, will factor in a more expansionary environment, or remain predominantly concerned about contraction and deflation risks.”

For the platinum and gold pairing, several catalysts are expected in the coming months that could support an appreciation in platinum prices, including a possible recovery in European consumer demand growth.

“Our platinum equities team expects forthcoming results from the sector will see another lowering of production targets, which is a function of continuing safety audits and resulting cost impact. Supply from South Africa faces further downside risks,” the analysts added.

In nickel and copper, restocking of the alloying metal is expected on increased demand for stainless steel.

“With better-than-expected economic data in the US, some reasonable strength in Japanese operating rates, and perhaps some stability in Europe, we believe that the market could witness considerable re-stocking into early spring,” Deutsche Bank said.

“We also expect that news flow from the new high-pressure acid leach nickel mines is likely to involve ramp-up delays, lending further support to prices,” the analysts added.

The analysts also offered some alternate structural pairing considerations, for short positions in gold and silver, and platinum and palladium, and long positions in copper and aluminium, and zinc and lead.

“The US mint has experienced very strong silver sales for January, over 5.1 million oz for the first 18 days alone, and is on track to set a new monthly sales record,” they said, of the silver and gold short pairing.

On the long copper and aluminium pairing, they added that copper has been a strong outperformer against the light metal for the last decade, while demand from the emerging markets has been similar.

“Despite some recent distortions, such as Chinese credit-related buying, we believe that the structural contrasts between the two markets will remain in place over the medium term,” they said.

Claire Hack
chack@metalbulletin.com
Twitter: @clairehack_mb

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