Over the past few years the price of tin has had a wild ride. Between April 2011 and July 2012 the vital industrial metal fell by 51%. However, with economic growth in China now gathering pace, the price of tin is rising once again. This article looks at how to profit from the rebound in tin.
Why is tin rising
Tin is used to coat lead, zinc and steel to prevent corrosion. It is also commonly used to coat steel containers in order to preserve food, however by far the biggest use of tin (around 52% of it) is used to make solder for use in electronics.
The increase in demand for electronics (such as iPads and smartphones) has run up against declining output from leading tin producers. In 2012, for example, it is estimated that worldwide production declined between 6% and 7% 2012.
In recent months this supply/ demand dynamic has began to have an effect on the price.
As the chart below shows, tin made a significant top in April 2011 before establishing a powerful downtrend. However, it made a bottom in July 2012 and in mid-September it broke above the blue downtrend line (circled). In November last year the price then dipped back to test the broken downtrend line which acted as support, and since then tin ETN (JJT) has advanced more than 25%.
A 2 year daily chart of the iPath Dow Jones-AIG Tin Total Return Sub-Index (JJT) (Click on the chart for a larger version)
Chart courtesy of stockcharts.com
Note: The iPath Dow Jones-AIG Tin Total Return Sub-Index is an Exchange-Traded Note (ETN) which is based on the Dow Jones-AIG Tin Total Return Sub-Index. The ETN is designed to provide returns that generally correspond to a single-commodity investment of a futures contract in Tin and is listed on the U.S. NYSE exchange under the ticker symbol JJT.
Leading investment research provider Trading Central SA, has a short-term price target for tin of $27,300 a metric ton. The target is calculated using technical analysis and represents a 61.8 percent Fibonacci retracement of the decline from the April 2011 high to the July 2012 low (blue horizontal lines on the chart.)
What are Fibonacci retracements?
Fibonacci numbers are most commonly used in technical analysis to determine potential areas of support and resistance. For example after a stock (or index) makes a reversal, technicians will use the Fibonacci sequence to plot various levels at which the stock might find support.
Known as Fibonacci retracements these levels are mathematical relationships, expressed as ratios, derived from the Fibonacci sequence. Fibonacci retracements are based on the idea that markets will retrace a predictable portion of a move, after which they will continue to move in the original direction.
A Fibonacci retracement level is created by taking two extreme points on a chart (high to low) and dividing the vertical distance by the key Fibonacci ratios. The retracement begins at 0.0% and extends to 100.0%, which represents a complete reversal of the original move.
The key Fibonacci ratios are 0%, 23.6%, 38.2%, 61.8% and 100%.
How to play the rise in tin
There is an ETF (TINM) that is listed on the London Stock Exchange (LSE), there is even a leveraged ETF (LTIM), also listed on the LSE, that is designed “to change daily by 200% the daily percentage change in the DJ-UBS Tin Sub-Index”. However, perhaps the best way to capitalize on the rising price of tin is via a spread bet.
Spread betting company IG Index lists tin among the six base metals they have available to trade.
Looking at the shorter-term chart below we can see that since mid-November the 20-day moving average has acted as support (circled). As a result it provides a sensible level for a rising stop loss.
A 9 month daily chart of the iPath Dow Jones-AIG Tin Total Return Sub-Index (JJT) (Click on the chart for a larger version)
Chart courtesy of stockcharts.com