The Use of Seasonal Adjustment and the ôPinch-Pointö Diagram in Forecasting Prices of Base Metals

One method of forecasting prices of metals is based on analysis of historic relationships between prices, inventories and consumption. The first, but generally overlooked step in this analysis should be to remove from the inventory and consumption figures the effects of seasonal variations. The next step is to construct diagrams which show prices plotted against ratios of inventories to consumption. These diagrams indicate that, when inventories are high, prices show little response to changes in inventories. Below a critical level of inventories, however, the psychology of the market changes and small changes in inventories lead to large moves in prices. The critical level of inventories is termed the "pinch-point"; the diagram which shows prices in relation to ratios of inventories and consumption may be called a "pinch-point diagram".