Trading Commodities

Spread Betting Commodities

Realise the benefits of spread betting on commodities.  Because the world’s commodity markets are highly volatile, commodity spread betting offers the chance to generate large profits. This is because with spread trading you can get the benefit of being able to trade a commodity with a smaller initial stake than would normally be required to buy it. For this reason, it’s a popular activity among novice and experienced traders.

Winnings generated from commodities spread betting are tax-free in the UK and you can trade from as little as £1 or currency equivalent, benefiting from rising as well as falling commodity prices. However please remember that tax depends on the individual circumstances and that it is subject to change.

Commodities are also a common vehicle for diversifying an investment portfolio since they have a low correlation to shares and bonds. Again, this makes them an attractive asset class for spread betters. Having said that, commodities are one of the more complicated markets to trade as commodity markets are typically quite volatile and influenced from numerous factors including the weather, economic factors, political risk and even the strength of the dollar.

More than 40 commodity markets are available to trade. These markets include metals – the likes of gold, silver, palladium, platinum and base metals – plus agricultural commodities such as live cattle and soy meal; energy bets including oil and natural gas, and the more esoteric markets such as carbon emissions.

Common Commodities offered:

  • COCOA – UK
  • CRUDE – UK
  • CRUDE – US
  • GOLD

What are the Commodity Markets?

Commodity markets facilitate the exchange of raw and primary products such as oil, foodstuffs and precious metals, with trading taking place on regulated global exchanges such as the New York Mercantile Exchange.

A commodity is characterised by its fungibility. In other words, it is classed as a commodity if the market places the same value on the product regardless of who produced it. Branded consumer products are therefore not seen as commodities, as certain brands produced by certain manufacturers are deemed more valuable than others.

Commodities trading can take different forms. The investor has first to decide whether to buy the underlying physical commodity or acquire indirect exposure via equities. For example, spot trading sees the immediate delivery of purchased commodities, while futures trading sees buyers agreeing to purchase now, then paying and taking delivery later. The emergence of trading products like exchange-traded funds (ETFs), exchange traded commodity funds (ETCs), contracts for difference (CFDs) and spreadbets have greatly facilitating the trading of commodities.

Global markets are in the midst of a fundamental shakedown. Traders can profit on the ensuing price volatility by placing financial bets on a range of commodities, whether gold or silver, oil, gas or ‘softs’. All spread traders have to do is pick a price direction of where they believe prices to be heading, and place their trade. If you get it right, you profit; otherwise, you book a loss.

How do you Make Money Spread Betting Commodities?

The main commodities offered by spread betting companies include Energy (oil, gas), Metals (gold, copper, etc.) & Softs (coffee, live stock, wheat, etc.), although some other commodities that fall outside these categories may also be offered. By their nature, commodities can be quite volatile and unpredictable for one of many reasons including severe weather, disease, war, fear, and other natural and man made factors that can affect supply chain. For this reason, trading commodities can offer great profits, but also serious losses if a bet goes against you. We do not recommend opening positions on commodities if you are just starting out in spread betting.

In addition to the above factors, as prices in commodities are quoted in dollars you’ll find most commodities will rise in the advent of a weakening dollar.  When betting on a commodity such as oil or gold (perhaps the most traded of the commodities), you are predicting its future price which will be based around some quantity or weight such as by the ounce, kilo, or barrel. Before spread betting came about, being able to bet on the movement of commodities was inaccessible to most personal investors due to the large sums of money required to buy the future contracts.

You make money from them the same way as almost anything else – buy low, sell high! BUT one of the best things about commodities is that you don’t need to do it in that order – you can sell high first, then buy low later! There are times when commodities fail to attract much attention but this certainly hasn’t been the case of late. For much of the last few years it was the high oil and gold prices that dominated the headlines. It has also been a bullish time for a number of other metals as unprecedented demand from China has squeezed prices higher. Major price moves such as these have tempted many traders to try their hand in the commodity markets.

Commodities trading is probably the sector where we have seen most interest – it has been a phenomenal period for commodities and many clients have done very well out of them albeit it is not for the faint of heart. Gold and oil speculation are by large the most traded markets. Spread betting on the gold price is reviewed here.

Commodity Spread Betting

Traditionally, if you wanted to acquire gold exposure, you would go and buy some gold bars or coins which was almost a bit cumbersome – or you bought stock in mind shares – today we have spreadbets and CFDs. Commodities spread betting involves betting on the movement of prices, generated by a spread betting company, which in turn are generally derived from prices on the world’s regulated exchanges.

Taking a position on the price of gold in the past also meant committing big amounts of capital to profit from a $10 intraday move, and the brokerage costs would sharply reduce any profits unless you were taking sizable position sizes.

With spread trading you can take a punt from as a little as £1 a point – permitting you the levels of gearing traditionally only available to institutions. Most spread betting providers will offer tight spreads on a range of commonly traded hard commodities, such as crude oil, natural gas, gold, silver and copper, as well as commonly traded soft agricultural commodities like wheat, coffee, sugar and cocoa.

The spread is the difference between the buy price and the sell price on any given commodity. If you believe the price of a commodity is set to rise above the spread, then you buy. If you think it’s likely to fall, then you sell.

Your profits, or losses, will be determined by the amount you bet as well as the distance the commodity price has moved above or below the spread.

The thing about commodities is that prices in any given market could leap or tumble in a blink of an eye. And thanks to the returns/losses they have made on gold and oil, a growing number of traders are now scouting around for the next big trading market. Commodity markets are in fact known for their volatility, so while they do provide opportunities for large returns, they also present the risk of large losses. In particular agricultural and softs production i.e. supply can be impacted by many of the same factors, and others such as extreme weather and crop pestilence which can lead to sharp swings in prices.

You can limit potential losses on your spread betting account by using automatic or manually-applied stops and limit orders. The leverage allows you to take potentally much bigger size positions to the oil price (or indeed any commodity) than your account balance would normally permit but it is important to note that this cuts both ways and you could easily get wiped out if you don’t have controls in place. A stop loss ensures that your trade will be automatically closed should the price of the instrument you are trading fall beyond a specified level (if you are long).

Of course you could also take a position on the companies which produce the commodities themselves like spread betting BP instead of taking a direct position on the oil price. This would also eliminate the currency risk – since you are not buying a derivative that tracks the underlying and not the stock itself you are not exposed to the risk of having gains reduced by a strengthening dollar.

Trading Example: Gold

You have noticed that the price of gold has been rising for the last 2 months and you decide that it’s going to continue to rise as many investors still see gold as a safe haven asset in the recent troubled financial times. It’s been reported that it has not yet reached its maximum price and should continue to rise over the next few weeks.

The spread betting company’s daily gold spot price is at 1011.6 – 1012.1. You decide to ‘buy’ (go long) at 1012.1 at £10 per point.

You now hear some contradictory news that interest in Gold has weakened and a downturn in market is predicted. You decide to get out now before it falls any lower. The price is now 1000.4 – 1000.9 so you decide to sell at 1000.4. This means a loss of 11.7 points x £10 per point = £117 loss.

You have made a loss of £107 (1012.1 – 1000.4 = 11.7 x £10 = -£117).

Trading Example: Oil

Perhaps the best known commodity, we’re always hearing how the price of oil per barrel has gone up due to a potential conflict somewhere or the increase in demand from some growing economy. Almost as quickly as it goes up however, oil can also drop back down when some oil producing country announces their upping of production or some political situation or conflict seems to take a turn for the better. These events and the changes to the price of oil produce the sort of volatility that traders love.

The two main oil futures that you’ll be offered are West Texas Intermediate (WTI) and Brent Crude Oil. WTI may appear under other names such as ‘US Light Crude Oil’ or similar. Brent Crude Oil comes from the North Sea, while WTI comes mainly from the Midwest and Gulf Coast areas of the U.S.

An few oil spread betting examples:

    • Example 1: Brent Crude oil is trading at $90.33 a barrel. You buy (go long) at £5 per point movement and close your bet out (sell) at $102.50 after a couple of weeks trading. Based on £5 per point/pip movement that gives you a £6,085 profit.
    • Example 2: A short while later you think the price of Brent Crude oil is due to come down, so you decide to short it (sell) at £5 per point. You get in for $105.20 and, as predicted, the price falls. You decide to close your bet so you buy (you always do the opposite of your opening bet in order to close) at $98.40 a barrel. This gives you a profit of £3,400.
    • Example 3: Feeling like things are going well you decide to up your bet to £10 a point and decide to buy (go long) at £77.32 a barrel on the assumption that oil is at its cheapest for sometime, so the only direction for it is up. A short time later, oil has continued its drop in price and trades at $69.70 a barrel. You quickly exit your bet realising your bad judgment. You have just made a loss of £7,620.

Although hypothetical bets, Example 3 was included to illustrate that it really is just as easy to loose as it is to make money, if not easier. Another reason for Example 3 is that it highlights a couple of glaring errors. 1) Over confidence from a couple of good bets, so you decided to double your usual stake. 2) You saw that oil was at its lowest price point for a while so decided to go against the market (you took a punt, not an informed decision), and 3) You could have set up a stop loss in order to minimise your losses, and to exit your bet at an earlier time.

What affects the Commodities Markets?

The world’s commodity markets are highly volatile and can be affected by almost anything, from weather events and storage problems to political instability and global conflict.

A war in an oil-producing country can restrict supplies, upsetting the balance with demand and causing prices to rise. Similarly, a drought in a wheat-growing nation can impact on the supply of the foodstuff, leading to price increases.

In addition, the prices of gold, silver and other precious metals and commodities are traditionally good mediums to store value and preserve savings during inflationary times.

Commodity prices are mainly driven by supply and demand with supply being the more erratic due to mainly weather disrupting production. Floods, drought and hurricanes can all cause a lot of damage to harvests and send prices through the roof. Prices can also fall if demand tails off or there’s an oversupply of a certain commodity. So if gold mining companies have a particularly strong year, but investors are shifting away from the precious metal, this could pull down prices.

Each commodity market is different from the next and what affects one will not necessarily impact on another.

Understanding this and keeping up to date with current affairs and developments in the world’s financial markets is key to successful commodity spread betting.

This is particularly true since each commodity has a distinct personality, so it’s a good idea to start small when betting on a new product. So if you have experience with gold trading but not with wheat, then you can use a demo to get a feel for the market.

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