Spread Trading Commodities

Commodities trading has attracted a lot of attention recently, with the oil spill affecting prices of crude oil and with the financial instability boosting gold prices, so it is not surprising there has been increasing interest in spread trading commodities. Because of the market volatilities, commodities can be a great place for spread traders to make money, but the rapid and massive swings can punish the spread better who is not prepared to deal with them.

Commodities include a lot more than just gold and oil, and that can explain some of the volatilities. For instance, crops such as corn, wheat, sugar, coffee, etc. are all traded as commodities, and these can be affected by the weather as well as by the annual growth cycle. Many metals are trading on the commodity market, including not just precious metals but base metals such as copper and steel where prices are affected by construction and industry downturns.

“Gold is priced in USD so traditionally by buying gold funds one is buying an asset priced in dollars and is therefore exposed to to movements of the dollar as well as the asset. This is not so with spread betting where all your profits/losses will be in pounds sterling.”

Even when you have decided to spread bet commodities, you have more choices than just the type of goods. You will typically find that you are able to spread bet on the change in spot price, or current price, of the commodity or alternatively take a view on the value of a futures contract, for the price at a certain date in the future.

The great thing about spread trading commodities for the active trader is that you can take part in the futures market, with all the opportunity for massive profits that this offers, without actually having to find the full price to buy a contract. Typically when you spread bet you can bet for as little as £1 for each point that the price changes, so you can gear your bets to your budget.

If the futures markets scare you because you have heard how much you can lose given their volatility, then spread trading can offer another reassurance, and that is the guaranteed stop loss or controlled risk bet. It’s not offered by every spread betting provider and it does cost more, but it sets a guaranteed limit to how much you can lose with a bad bet.

As an example of spread trading commodities, perhaps you think the price of gold is going to rise and want to spread bet on this as you do not have sufficient funds to invest in gold directly. The quote for spot gold is 1259.3 — 1259.8. As you are expecting an increase in price, you buy a position at 1259.8, spread trading £10 per point. A little later that day your spread betting provider is quoting 1286.7 — 1287.2 for spot gold, and you decide to take your profit.

You take your profit by selling, which would be at the lower price of 1286.7, giving you a gain of 26.9. As you bet £10 per point this would give you £269 profit. If gold had lessened in value, you could have lost a significant amount, so it is very important when spread trading commodities that you watch prices closely and set stop losses.

“In these uncertain times, is gold worth buying? I know gold is at an all time high right now and appears to be at the top of a spike, but when it comes back down to sensible levels, is it pretty recession proof?”

I cant make up my mind on the direction i think gold is headed, generally as the dollar falls, gold rallies – as many if not most buyers are not based in USD. So as the USD falls relative to their currency, gold becomes cheaper (in non-USD terms) so they buy more… So, many pundits are saying that a lot (not all) of the recent gold rally is due to nothing more than dollar weakness.