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.
One commodity seeing increased interest from speculators is robusta coffee, which is traded on the London-based derivatives market Liffe. (Robusta, 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.)
World shortages have pushed the cost of robusta coffee up sharply over the past 12 months from $996 a tonne to its current price of $1,462 a tonne. In fact, coffee prices have climbed so high that US coffee roasters Kraft, Massimo Zanetti and Procter & Gamble are passing the costs on to consumers and raising their prices for major brands such as Maxwell House.
According to GFT Global's Slaney, coffee is a market that will often be quiet for considerable periods of time before 'going berserk' on the back of a weather report. This seems to be the case in the robusta coffee market as prices have yo-yoed dramatically for over a month, which has predictably caught the attention of a number of traders. Prices were at a 12-month high of $1,576 a tonne in late September, but that all changed when growers in Brazil - the world's largest producer of coffee - received some much-needed rain, while reports from Vietnam, the largest grower of robusta coffee beans, indicated that yields would be significantly higher than they were last year.
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.
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.'
Although there are an impressive number of commodities bets out there, whether or not you can actually bet on a specific commodity will depend on a number of factors. For a start, certain spread betting companies simply will not be able to offer clients bets on certain markets as they do not have permission from the relevant exchanges to quote prices. So if you believe that you can follow in the (fictional) footsteps of Trading Places' protagonists Winthorpe and Valentine - played by Aykroyd and Murphy respectively - and make a killing by betting on the orange juice market, a look at the spread betting providers shows that only a handful of spread betting companies will be able to take your bets.
Curiously enough, Winthrope and Valentine made their money by betting that orange juice prices would go through the roof due to poor supplies. That seems to be happening in real life, as orange juice prices last week hit a 16-year high thanks to poor crop results.
Another thing to bear in mind is that with certain spread betting companies - such as City Index, Selftrade and IG Markets - the range of markets you can bet on will depend on what type of account you have.
For example, clients who have ordinary accounts with City Index will be able to trade on more than 20 different commodities and dozens of different commodities contracts. However, clients with limited-risk accounts - where stop losses are automatically put on every trade - will find that they are limited to three commodities - gold, silver and oi.
Additionally, the amount traders can bet using limited-risk accounts is capped. If you have an ordinary account with City Index, you could bet up to £500 a point on gold, say. With a limited-risk account, the most you will ever be allowed to bet is £25 a point.
The other thing to note is that, if you want to trade using a limited risk account, pound for pound it may very well cost you more. For example, the spreads on all commodity bets available using IG's controlled-risk account - which is similar to the limited risk accounts offered by City Index and Selftrade - are higher than the ones available to those who have ordinary accounts with the financial book maker. If you have a controlled-risk account with IG and want to bet on the price of NYMEX-traded crude oil futures. IG quotes a spread of 12 for controlled-risk account users; for ordinary account holders, the spread on the same contract is just eight.
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