Financial spread betting companies offer spread bets on a wide range of metals, oils and other commodities. In contrast to futures, spreadbets allows you to deal in very small sizes; typically you can place a spreadbet for as little as £1 per point. IG Index for example quotes a number of commodity markets including gold, silver, copper, Brent crude oil, West Texas crude, coffee, sugar, wheat, soya beans, soya bean meal and soya bean oil amongst others.
“Spread betting offers a very easy way of trading commodities – the contracts are very much similar to futures but the stakes are smaller (although the spreads are often bigger).”
Most of these contracts take the form of futures contracts, expiring anywhere between the next mid-month and six months’ time. One thing I should say from the beginning is this: These esoteric markets are all very well, but it is not straightforward to get hour by hour information on how the market is performing, let alone the minute by minute information you really need when things are moving fast. Some markets like uranium or plutonium aren’t even quoted by most spread betting providers because the markets are too thinly traded. That is why I advise you to stick with a couple of main indices and one or two common currencies or blue chip stocks in the beginning. As least you can follow these prices closely…
But what are Commodities?
The whole concept of futures markets was invented for the commodities market. But why are are commodities traded in the first place? Well, mainly because there are variations in demand and supply and both the suppliers, and the consumers, will want to hedge out these fluctuations and provide a level of financial certainty.
Farmers growing wheat or raising hogs wanted some sort of insurance that their hard efforts would not come to nought in six months when they finally got to market. The evolution from an agricultural, event-driven cash market (you raise cattle and bring them to the market; you accept the prevailing cash price) to a highly sophisticated commodity exchange where date ranges for futures extend out into the next year and beyond, and where there are options to be traded as well, is a function of competitive success. The advent of futures trading offered farmers some insurance against the dramatic fluctuations in market price which could ruin them.
Commodities are hence a traditional market that has traded for centuries, and include prices for gold, silver, and crude oil, as well as agricultural products such as sugar, wheat, and cocoa. Traditionally, commodities like gold and oil are the most commonly traded although today spread betters are also looking into other commodities such cocoa, coffee, sugar, wheat and pork bellies – albeit on a smaller scale.
Chicago is the main market where commodities are traded. There is no bigger range of soft, hard and energy (as well as interest rates and weather futures for that matter) contracts anywhere in the world. The giant Chicago Mercantile Exchange Groups comprises the Board of Trade exchange (CBOT) and the CME, the New York Mercantile Exchange (Nymex) as well as the Commodity Exchange, Inc. (comes), offers a range of hard and soft commodities, energies, weather and financial futures and options and each of them provide risk management to market participants.
But what are commodities? An attribute of commodities such as gold, oil and wheat is that they consist of goods which are interchangeable in any part of the global marketplace. For instance, a barrel of crude oil would be worth the same value irrespective if this is bought in the United Kingdom or the USA. This is a property which makes commodities different from other tradeable products such as wine and cheese, which come in a variety of strengths, flavours, ingredients and so on, and for this reason prices of such commodities can vary to a large degree in different regions of the world.
Of course some commodity markets are more important than others; for instance crude oil and copper are often used as a barometer of the relative health of the global economy, while the gold price is often seen as a safe haven in times of economic turmoil.
Commodities You Can Bet On
The two most popular commodity trades are those on oil and gold, reflecting their importance as investment assets. Among soft commodities, trades are offered on soyabeans, cocoa, coffee, sugar, cattle, hogs, pork bellies, orange juice, cotton, wheat, oats, corn, lumber and even potatoes. Commodity trades are also offered on silver, platinum, palladium, copper, aluminium, lead, nickel, zinc, tin and natural gas.
‘For many investors, one of the revelations of the last few years has been the money that can be, or could have been made, through exposure to commodities. Not just the obvious homes for money in times of stress – like gold and oil – but also commodities of a more mundane hue.’
Here’s a list of commodity markets that are found at most spread betting providers (some smaller providers may quote less markets).
- Cocoa (London and USA)
- Coffee (London and USA)
- Orange Juice (USA)
- Potatoes (London)
- White Sugar (London)
- Sugar (World)
- Crude Oil Spread Betting
- Heating Oil
- Gas Oil
- Unleaded Gaoline
- Brent Crude (London)
- Gold Spread Betting (USA)
- Palladium (USA)
- Platinum (USA)
- Silver (USA)
- Aluminium (USA)
- Copper (London)
- Copper High Grade (London)
- Lead (London)
- Nickel (London)
- Zinc (London)
- Tin (London)
Commodities are one of the most potentially profitable world markets. Actually buying and selling commodities is outside the reach of even quite large investors, and also extremely risky. However, betting on the markets is much more affordable, and the risk is also more acceptable.
“Many spread traders view oil as a good barometer for the condition of the health of the global economy. This is because when the economy is performing well, a greater amount of oil will be consumed, which pushes the price of oil higher. In contrast, gold is often used as a hedge as traditionally the price of gold tends to retain its true value in times of economic uncertainty, during which other main currencies and commodities tend to lose value.”
At its simplest, betting on commodities is a way of making money by trying to predict the prices of basic goods into the future. When you bet on commodities you are betting on the future prices of any kind of commodity on the world markets, but some of the most common ones are : Metals, such as copper, lead, gold, silver and zinc; so-called soft commodities, such as coffee, cocoa, potatoes, wool, nuts and rubber; grains which include maize and soya beans and energy, which includes crude oil, petroleum and gas.
Spread betting represents one of the easiest and most flexible ways to speculate on commodity prices whether that be oil, cotton or wheat. Spreadbets are not only straightforward to understand and tax-free but bets are also quoted in sterling. Additionally, with spread betting you can easily alter bet sizes so as to be able to magnify profits or losses for only a small outlay (the “leverage” effect) but beware that commodities are highly volatile. While it is true that you can make big profits by betting on commodity future prices don’t be misled by claims that it is simple to make money. To trade successfully you need a methodical approach, and you need to build up a knowledge of commodities and their markets.
Commodities markets can be very volatile. For you, the spreadbetter, this means big opportunities for huge gains, and equally dramatic losses. This is a real roller coaster ride. Often, a commodity price will remain stable for quite a long time, and then make a dramatic move, up or down. Coffee, potatoes and Orange Juice for example, are quite capable of doubling or halving over a relatively short period.
You should also be aware that commodities market operate limit systems. This means that you can be locked into a position, sometimes for days, whilst the market moves against you. Your losses could be considerable in this situation. It might be wise to make a Controlled Risk Bet (i.e. a spread bet tied to a guaranteed stop) which absolutely limits your losses to a set maximum, decided in advance by your good self.
Hence, these types of investments are classified as high risk. Therefore betting on them should also be considered as high risk. The values of commodities can fall as well as rise, and you can therefore bet on both rises and falls. This means, however, that while big profits are possible big losses can also be made. You should never commit yourself to a deal that is more than you can afford to lose, no matter how sure you are that, for example, world coffee prices will skyrocket!
Predicting Commodity Prices
China’s importance in the commodities sector is a given, as the most populated country in the world, but it is how the country’s consumption is divided up that it is particularly noteworthy for traders. The country’s commodity consumption can simply be divided between the daily needs of its populace and industrial inputs. As such most mining shares’ gains will be connected to the demand in China and the underlying price of the commodities
Choose one market to bet on initially. There are rules on how far in advance you can buy and therefore bet on each particular commodity. This is known as the forward period. It is mostly three months, but can be several years for some commodities. Your financial bookmaker will tell you what commodity markets are currently available.
To bet on commodities successfully you need to be well informed. Check back to find how the price of your chosen commodity has risen or fallen over the last few years – price changes are often cyclical. Follow trends. Use the financial newspapers, magazines, newsletters and websites which we have already outlined. The Commodity Research Bureau (CRB) of Chicago publishes the most detailed information on commodity prices. It covers the world’s major markets, London and Chicago, and is quoted in US dollars.
In general terms future market prices for commodities depend on :
- Future Demand : This is the single most important factor when trying to predict future commodity prices. Try to anticipate this and hence anticipate whether the price for your chosen commodity will fall or rise, and how quickly or slowly. Demand can depend on factors such as season, taste, how fashionable or unfashionable a product becomes and new technologies which require larger supplies of certain commodities while making other commodities less sought after or even redundant.
- Booms and Recessions : The nations of the world usually go through boom and recession on a cyclical basis. The important thing to remember is that commodity prices usually lag the peaks and troughs of booms and recessions, unlike share prices which usually precede them.
- Natural Disasters and Wars : These situations serve to restrict the supply of commodities, and hence force the price up. They are notoriously difficult to predict but note that, typically, a natural disaster occurring or mere rumour of a war can cause commodity prices to rise even if the supply of the commodity is not affected.
- Exchange Rates : Most commodities are bought and sold worldwide in US dollars. If you are betting in any other currency a change in the exchange rate can affect the price independently of any other factor.
Although commodity prices have tumbled from their highs, they remain substantially higher than at the start of this bull cycle, and with growing middle classes in emerging growth economies such as China, India and Brazil, secular demand for commodity goods is likely to remain elevated even in the face of global economic slowdown.
Commodities have long been a favourite market amongst spread betters and short-term traders. The fact that they’re often volatile means there are plenty of opportunities to grab a quick-fire profit. However, as well as being susceptible to sizable moves, some commodities also behave repetitively at certain times of the year, which makes them especially popular among traders who follow seasonal strategies.
One advantage of using a spreadbet to trade commodities is that although the underlying market is priced in US dollars, you are trading in pounds per point, so spread traders can eliminate the foreign exchange risk. For instance, IG Index is presently quoting a price on corn of $6.44-$6.45. If you are of the opinion that the price will rise, you could buy at $6.45 with the minimum of £3 per point. In this case for each cent rise in the underlying price, you would make (and the opposite is also true – every cent fall in the price would lose you £3).
You can trade commodities in the spot market or in the futures market, where trades are contracted to take place at a certain date in the future, and the price of the contract will vary according to what the market believes the price will be at that time. Spread bets based on futures contracts will automatically close on the relevant settlement date. As with the indices there is no commission, although the provider will add a little extra onto the market spread but it is worth noting that quite a few commodities are relatively cheap to trade (i.e. narrow bid-offer spreads especially on the popular commodities).
One thing to keep in mind is that commodities have different trading and quoting hours from many other markets and also different tick sizes. Most commodity markets are still pit traded which in practice means that commodities such as soya beans, bean meal and bean oil trade from 15:30 until 19:15; pork bellies will trade from 15:10 until 19:00; coffee from 14:25 to 17:25, and orange juice will trade from 15:00 until 18:30 no matter when the annual crop report is published. The precious metals markets have slightly longer trading hours, in particular gold, which is available from 09:00 until 18:30. Copper is open from 13:10 until 18:00, platinum from 13:40 till 18:05 and silver from 13:25 until 18:25. Nymex crude trades from 07:00-19:30.
Just keep in mind that for each commodity, there is a minimum bet, a trading period, a spread, a controlled risk spread, a deposit factor, and an explanation of what ‘one point’ means. There are all contained in the a reference book or pdf document given to you when you join.
For traders looking to speculate on short-term price movements, the way gold and oil prices tend to move makes them ideal vehicles for financial spread betting. Both markets are highly volatile which means that the price can move a lot in a short period of time. For instance as a result of all the political turmoil in the Middle East and North Africa, the oil price quickly reacted by moving from $96 to $106 dollars in just a matter of days, with a movement of $6.50 happening in just one day. That amounts to 650 points, which can be painful if the market moves against your predicted direction.
In all other respects spread betting on commodities is simply betting on the price movement of hard goods and the way such goods are bought and sold around the globe. If you buy or ‘go long’ and the price goes up, then you profit. If the price goes down you lose. You can also sell or ‘go short’ just as easily, betting on the price going down. Unless you understand what drives the futures markets, and particularly the agricultural markets which prices can be dramatically be affected by a multitude of events including political developments, global weather patterns and crop reports, seasonal factors, transportation and distribution issues, trade embargoes, etc., this may be a type of spread betting market which is best avoided. For example, the commodity prices such as soybeans, wheat and pork bellies can be influenced by a number of fundamental events ranging from political decisions and weather forecasts to crop reports and seasonal factors. In this respect commodities are some of the most volatile and unpredictable products on which a trader can spread bet on and beginners would do well to focus their spread betting on less volatile markets such as shares or indices.
What makes commodities spread betting even more demanding from a trading perspective is that, most of the time, the news affecting commodities tends to follow the price movement, as opposed to the other way round. This makes effective risk management an important element of commodities spread betting. Those speculators keen on trading with technical analysis will attempt to utilise charts to help them times purchases and sales. As with forex trading, major commodities like crude oil, gold and copper are very liquid and thus quite responsive to technical analysis which you could use to time trade entry or exit. Technical analysis charts and tools can also help you to check just how volatile a commodity market can be before you put any capital at risk. Simply look back at some historical charts to check just how wide the price bands have been in the past. And watch your bet sizes and use stop losses to limit any damage. In an effort to make the risks more manageable spread betting providers have also introduced guaranteed stop-loss orders for commodities which guaranteed to close your spread bet at a pre-determined level without limiting your profit potential, incurring a small premium for doing so.
Of course if you want to, you could also speculate in the stocks of mining, agricultural or energy companies which is a geared way of playing commodities since the stock of producers typically moves more than the underlying raw commodity’s price. This also introduces extra risks like the quality of management or risk of a country’s legislature (particularly since some of these producers are based in economies that are still emerging) disrupting the company’s business. Here it is really important that you understand the market you are trading and what affects the prices of the commodities you are speculating on as well as its correlation to other asset classes.
In any case speculation on commodities all about discipline and risk. It is said that the risk of trading IG crude is almost 7x the risk of trading IG gold @ constant bet size. Novice traders are far more likely to hold discipline on gold than they are on oil. It also tests the truth about your ability to be disciplined as it requires a lot of patience to make a profit from £1pp on gold than it does on the 7x riskier oil. Anyone should be comfortable holding gold overnight but might be fearful to hold oil overnight with 7x more risk. On the 5th May 2011, oil prices dropped for instance dropped $11 in one single day, which from a spread betting point of view is a staggering 1,100-point move. Anyone trading it with a 50 or even 100- point stop loss would have been taken out very quickly. The issue here is not the volatility of the market as such, but misuse of leverage that tends to catch people out and make them fearful of wild swings.
Here it worth noting that even commodities markets can attract the masses during periods of economic turbulence. The wheat market for instance was pretty ‘hot’ in the summer of 2010 when fires destroyed a large part of Russia’s annual crop. Likewise, a serious crisis in the Middle East may very well put upward pressure on oil prices as famously happened in 1990 when Iraq invaded Kuwait, which caught most energy traders by surprise. The gold price has been rising steeply recently due to concerns that governments may be printing way too much paper money.
“I can’t believe how fast oil moves, I made a cup of tea and was stopped out before I dunked my first biscuit. I was going to celebrate with an oreo but put them away and made do with a rich tea.”