Tips for Spread Betting on Gold

1. Did you know that the letter 'G' in IG Index refers to gold? Indeed Gold was the first speculative product offered by IG Index when financial spread betting first emerged in 1974.
2. Betting on gold has always been popular due to the metal's inverse correlation with the dollar and equity markets. Gold is also one of the best known ways of playing weakness in the dollar and spread betting allows you to gain exposure to gold in sterling (thereby eliminating the exchange currency risk).
3. But more than that. Spread betting allows you the possibility to speculate on the future price of the metal without having to accept ownership. Remember gold in itself pays no interest or dividends unlike bonds and equities. In fact it actually costs money to hold it because there are storage and insurance costs to be paid.
4. One of the advantages of spread betting is that you can go short but remember that this also requires to be contrarian and look beyond the media headlines. In other words when the tabloids finally start highlighting the fact that US dollars are losing lots more purchasing power and 'Joe Sixpack' starts looking at investing in Gold it may be time to consider shorting it...
5. The other advantage of spread betting on gold instead of buying into an exchange traded fund, for instance, is leverage. In fact most spread betting providers allow a gearing of up to 40 times your stake (20 times if going for a gold futures contract) although this also increases the risk (hence the importance of guaranteed stop losses on trades).
6. Gold like any other currency is a 24-hour market so you can deal round the clock. Most spread betting firms offer a daily rolling bet on gold as well as a longer-term bet based on the two-month futures contract.
7. The daily rolling bet allows you to take a short-term view of Gold and will mirror the gold spot price - plus a dealing spread of course. Spread betters can roll the position over into the next day although this will incur a small additional cost (aka financing charge).
8. Normal closing time for the Spot Gold and Spot Silver markets is 22.00 (London Time). It is important to note that with some providers daily bets expire without spread.
9. When a Spot metal bet is rolled over, the open bet expires at the official spot settlement price and a new bet is automatically opened for the next trading day at the settlement price plus or minus the provider's rollover spread (say at 0.02% of the price).
10. A spread bet on a gold futures contract is priced directly from the futures market, with the provider simply wrapping the spread around the quote. As with other commodities and index contracts this will differ from the spot price as it reflects the cost of carry over the remaining time to expiry. It is also important to appreciate that a spread bet on gold futures always expires the month before the futures contract itself settles.
11. A key point to check is the tick size as providers such as Capital Spreads and City Index will use a tenth of a dollar/troy ounce, while at IG Index this is ten times larger. For instance, at Capital Spreads, gold trades are calculated at 0.1 per US dollar. In simple terms, this means that for every dollar you move, you would either make or lose 10 times your stake. So if you buy £8 worth of points and gold moves up $3 you would make £240 (£8 x 3 x 10).
12. The spread for the Rolling Gold Daily is normally 5. This means that a £2 per point bet on Gold would be equivalent of 40 ounces of Gold as you are betting on the $0.10 move. The Gold April Future is currently showing a spread of 8 points.
13. Contango and Backwardation
• The LME has an important peculiarity. The main quoted price for all LME metals is the so called 3-month price, a price for metal to be delivered on a particular date in roughly ninety days time. The 3-month price quoted on, say, 3 July, and the 3-month price quoted on, say, 17 July, a couple of weeks later, are thus prices for different settlement and delivery dates. (This is in contrast to the situation in other commodity futures markets; 'March Cocoa', for example, has the same settlement date whether you trade in December or in February).
• This peculiarity has an important practical consequence when you bet on LME metals with a spread betting provider. Say, for example, you 'buy' 3-month copper. A week later the price rises and you decide to take your profit. You cannot close your position simply by 'selling' 3-month copper, because the 3-month date is now a different day. Instead you have to 'sell' copper for the same date for which you 'bought' it. The price for this date is not normally the same as the current 3-month price. It may be lower, if the market is in 'contango' (where the price for future delivery is higher than the spot price), or higher, if the market is in 'backwardation'. When metal is in short supply, backwardations can sometimes be very large. So you should be aware that it is possible to lose money on an LME bet even if the 3-month price has moved in your favour, or make money even if the 3-month price has moved against you.
• If this sounds confusing consider contango like the fair value, in that fair value is basically the cost of carry. But, while fair value is more the arithmetic calculation of where the price should be, contango for instance is where it actually is. Let's take an example. The April Gold Future is trading at 922 but the Gold Spot price is at 922.8 so this is an example of backwardation. Normally a future is higher than the underlying spot price, ie Contango. However, the combination of lower US interest rates (so lower funding) and the April Gold contract being close to expiry (27th March so less funding days) has resulted in the backwardation price.
14. Although the average gold spread better has a much longer term than the average client and gold punters tend to take out bigger positions, spread betting is not really designed as a long term investment medium. Bets can be rolled forward from one expiry date to the next but this comes at a cost so spread betting on gold is best confined to situations where you believe that the short-term price is out of line with events.
15. Gold is not the only metal available either – you can speculate on gold's poorer sister silver or copper or aluminium, uranium, platinum or palladium. However be wary that copper is hugely volatile (more risky) and it is also difficult to predict the price of aluminium (although aluminium is a very liquid market). It takes substantial energy to produce aluminium so prices tend to be stressed by the cost of energy. Silver does tend to move more in tandem with Gold although it attracts less interest.
16. Other ways to gain exposure to Gold include exchange traded funds (such as iShares COMEX Gold Trust) which track the actual price of gold or silver, stock shares in gold mining companies and gold mining funds Gold stocks give you a little more leverage than owning the metal itself but this comes with more risk. Owning stock in a company exposes you to their business practices, failure or success in finding new gold deposits...etc. In particular, beware of gold mining firms that have hedge positions (meaning they have sold gold in the futures markets, so they will NOT profit if the gold price goes up.

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