by Geoff Ho
Any traders worth their salt know that volatility is the key to making money - but given the coverage oil and gold receive, you could be forgiven for thinking that these are the only two commodities worth considering.
This is clearly not the case. If it were, the spread betting companies would not have bothered making more than 40 other commodity markets available to their clients, with plans for many more on the way.
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.
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In fact, if you have ever watched the film Trading Places (which stars Eddie Murphy and Dan Aykroyd and is arguably the best film ever to feature commodities) and have always wanted to trade pork bellies or frozen concentrated orange juice futures just like they do in the movie, you can do just that thanks to the spread betting providers out there.
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.
'Thanks to gold and oil, commodities are now seen as volatile and the spin-off of that is that we are seeing more and more people looking at the soft commodities [foodstuffs such as cocoa, sugar, and Coffee] and trading in other precious metals such as platinum and palladium,' says Martin Slaney, head of spread betting at GFT Global.
This change in traders' attitudes is just as pronounced in the CFDs market, where according to Blue Index head of dealing Richard Curr, platinum and sugar are seeing more action. On the London Bullion Market, silver has gained more than 50% to $11.14 a troy ounce over the past year, which is impressive enough. But what has drawn traders is the silver market's increased volatility - over the past month the metal has traded sharply up and down between $11.74 and $10.70 an ounce. 'Silver has received a lot more attention from traders in recent times.
Sugar has been pretty wild too and has generally seen a lot more interest over the past six months,' says Curr. 'But people do not really care what it is they trade as long as it moves. Gold and oil has it [volatility] and now we're seeing it in silver and sugar.'
In general, spread betting companies do not charge clients anything directly, apart from financing costs on long (buy) bets, making their money by adding to the market spread on individual shares, indices, commodities and currencies.
Silver has been so volatile in recent sessions that according to City Index's chief market strategist, Tom Hougaard, the spread betting outfit has widened its spreads to compensate for its effects. 'Silver is the new Dow for traders,' says Hougaard.
Coffee, one of the most popular stimulant beverages worldwide firstly originated in Ethiopia and Yemen and robusta Coffee is especially getting increasingly popular with speculators. Robusta Coffee, incidentally, is a type of Coffee bean that has around twice the amount of caffeine compared with arabica, accounts for a third of the world's Coffee crop and tastes more bitter but gives a higher crop yield than arabica.
The production of Arabica or Robusta Coffee mainly depends on the weather, harvesting practices and disease. So monitoring these variables, particularly in the major Coffee producing countries, will provide an understanding of Coffee supply and its intrinsic value, when compared with demand.
The current spread for Coffee Robusta is $2196 - $2204. That means you can spread bet on Coffee to close lower than $2196 per tonne or higher than $2204 per tonne. If you were betting £2 per dollar and the price of a tonne moves $20 then your profit / loss would alter by (£2 per dollar) x $20 = £40.
Remember also that when spread betting soft commodities although the units the commodities are traded in on the exchanges is fixed, when spread betting on commodities you can trade in the currency that suits you eg Pounds per unit, Euros per unit or Dollars per unit.
Coffee Arabica is traded in 0.01cents/lb (pound). Therefore you could bet 5 euros per 0.01 cent for instance that Arabica goes up or down. If the price / lb then moved by 0.30 cents then your profit or loss would alter by 5 Euros per 0.01 cent x 30 = 150 Euros. Likewise you could bet £8 per 0.01 cent that Arabica goes up or down. If the price / lb then moved by 0.20 cents then your profit or loss would alter by £8 per 0.01 cent x 20 = £160.
Capital Spreads managing director Simon Denham says, 'Coffee trades are now coming through, even though the market has been weak in recent trading, down to $1,459. The nice thing about it was that it had risen to a high of $1,576 before the fall. Coffee is popular now because it is volatile, it has become one of the more tradable commodities.'
'Thanks to gold and oil, commodities are now seen as volatile.
We are seeing more and more people looking at the soft commodities ...
and trading in other precious metals such as platinum and palladium'
Another market attracting traders in droves is wheat. The soft commodity has hit the headlines due to the fact that shortages caused by bad weather in all the main producing regions could result in the price of the average loaf of bread rocketing. Prices - which gained more than 18% last week - are currently at a 10-year high following new data from the US Department of Agriculture, which shows supplies have dropped to a 25-year low.
Traded on CBOT, Wheat is a member of the grain family that includes rye, corn, oats and rice. Wheat is among the most important of cereal crops grown in many regions of the world. It is Canada's most important grain crop, produced in nine of Canada's territories.
Exchange - Wheat (W) is traded on the CBOT.
Opening Times
Open Auction: 9:30 a.m. - 1:15 p.m. Central Time, Monday to Friday.Contract Months - July, September, December, March, May
Contract Size
One CBOT Wheat futures contract of 5,000 bushel.Tick Size
1/8 cent per bushel equates to $6.25/contract.Spread-Betting Wheat - To spread bet the equivalent of 1 Wheat Futures contract would require a position size of £25 per point. The contract is called Wheat on IG Index
Supplies from Australia - which produced close to 15% of the world's wheat last year - are coming under pressure thanks to worsening droughts down under. Dry weather has already hit harvests in the US, Europe and India and the news from Australia has forced wheat for December delivery up to $5.34 a bushel on the Chicago Board of Trade. Trading in wheat has been so frantic that the London market went 'limit up' - achieving the maximum price increases allowed in a single day by Liffe - twice last week. With many analysts now predicting that wheat will soon hit $6 a bushel, traders are now jumping into the market in a bid to cash in on booming prices.
'We're starting to see interest in wheat now that it has hit the headlines. Clients are long at the moment - the market has gone limit up twice in recent days and recently reached a 10-year high,' says Denham. 'Clients are looking for the next commodity on the move and have decided that softs such as wheat are the place to be.'
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