As the global economies have grown, commodities have become increasingly popular for today’s trader.
Commodity markets offer you the opportunity to take a view on a vast array of products such as;
- Precious metals; including Gold and Silver
- Soft commodities; including Cocoa and Coffee
- Grains and livestock; including Soybeans, Oats and Wheat
- Energy contracts: including Brent Crude and US Light Crude
Energy includes oil, gas and coal. Hard commodities are precious and industrial metals, like gold or copper. Soft commodities are crops such as hogs, coffee or corn.
Clients should be aware that commodity prices can move spectacularly at times. Markets such as Orange juice and Coffee can halve or double in value in a short period of time. Supply and demand issues can significantly affect the volatility of certain markets due to crop surpluses or sudden extreme weather conditions that can wipe-out an entire crop. Commodity prices can thus be very volatile.
The risks are compounded due to the fact that many of these markets have price limits. This means you could be locked into a position for several hours, days or even weeks with no opportunity to close your position. You cannot sell a contract that is limit down or buy a contract that is limit up, either in the market or with the spread betting provider.
All the commodity products vary in the way they trade (it is especially important to take note of the ‘bet per’) and the trading hours due to the nature of the underlying markets. If you are interested in trading commodities please refer to the market information sheets for clarification on expiry dates, bet per and other important information since these may differ significantly from the underlying market.
- Industrial metals tend to do well during economic boom times.
- Precious metals can be a good hedge against inflation.
- Can now be easily traded via spread betting and CFDs.
Anyone can trade these instruments but I think that commodities are more suitable for experienced traders particularly as unforeseen events such as weather can influence supply and demand. However this does not mean you should not trade commodities but rather a basic understanding of how they function is a good idea for novice traders.
Spread betting on commodities has increased in popularity in recent years with providers providing the option to speculate in markets like gold and oil. Traditionally, dealing in futures linked to metals and soft commodities has been prohibitive for many retail investors but with spread betting you can trade contracts for as little as 10p a point.
Example of a Commodity trade:
Important information that you should be aware of before you trade:
- What is the ‘bet per’? (0.10 cents)
- What is the MR? (3%)
- What is the provider’s spread? ($0.7 or 7 points)
- What is the dealing period (07:00 – 21:15)
Opening a position:
Today is March 20th and you believe that the price of Gold will increase
The provider is quoting Gold Rolling at:
Gold Rolling: SELL 750.0 – 750.7 BUY
You buy £5 per point at 750.7. to OPEN your position
Closing a position:
Today is April 3rd and the provider is quoting:
Gold Rolling: SELL 745.5 – 746.2 BUY
The market has moved against you after the government announced that it was looking to sell some of its gold reserves. You decide to close your position and sell £5 per point at 745.5.
Opening Level: 750.7
Closing Level: 745.5
Difference: 52 (note the ‘bet per’ is .10 cents)
52 x £5 = £260.00
This trade resulted in a net loss and therefore the result is
– Loss: £260.00
Like the FX market, overnight financing charges for rolling gold and silver are applied using Spot Next points. See the currencies section for more information about Spot Next points.