There are times when commodities fail to attract much attention but this certainly hasn't been the case of late. For much of last year it was the high oil price that dominated the headlines, but more recently the focus shifted to rise in the price of gold. 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. 'This 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,' says Tom Hougaard, chief market strategist at City Index.
Cantor Index, has also witnessed a significant increase in interest. 'Gold has been our biggest commodity market and with the price rising from around $380 an ounce to over $450 it has been pretty much one-way traffic, with some clients doing extremely well,' says David Buik, head of marketing at the company.
Since peaking at $456 in early December, the gold price has fallen back to around $425. But Buik adds, 'People tend to take a longer-term view on gold and set their stops wider, as otherwise the short-term setbacks could leave them stopped out.'
Gold had not previously traded at the $450-an-ounce mark for some years. A large part of the price rise has been down to the weakness in the dollar, as in times of crisis people view gold as a store of value. Many commentators feel that extent of the twin trade and budget deficits in the US means that the dollar is likely to continue to fall in 2005. 'People genuinely feel that when the world is such an uncertain place gold represents a sound bet,' says Buik. 'There is after all still some way to go before it reaches the high of $850 an ounce that we saw back in 1980.'
Hougaard says that the gold and the oil markets both experienced an upward trend last year. 'People have been jumping on the momentum, buying on the dips and possibly holding the position for weeks,' he says. 'Spread betting on these markets means that any profits are tax free and there is greater flexibility over the size of the exposure than there is when trading the futures contracts directly.'
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IG Index has recently introduced a daily spread betting contract on Nymex crude with a tight six-point spread that has attracted a lot of interest from day traders. The firm also quotes a spread on the futures price.
'We saw some heavy selling as Nymex approached the $50 dollar mark but when it reached $52 there was a change in the strategy as the shorts were squeezed,' says Oliver Imre, a senior trader at IG Index. 'The market has now pulled back and we are seeing a lot more two-way business, with views divided as to whether it will recover or fall further.'
Geoff Langham, head of trading at CMC Deal4free, says that for a month or so Nymex seemed to establish a fairly wide trading range of $45 to $55 per barrel. 'There were sound underlying reasons for the increase in the oil price, but I think the market itself pushed the price beyond that suggested by the fundamentals when it went past the $55 level,' he says. 'The oil market has been unstable with uncertainty in particular over the fate of Yukos and the situation in Venezuela.'
Buik cautions that the risks mean oil is a market best left to the professionals. 'We have a couple of dozen professional traders who have done very well out of it this year but there has also been a trail of devastation among the amateurs,' he says. 'Traders need to watch the derivative markets to see where the weight of money is so that they know when to take profits.'
To highlight the danger, the release of news in early December that US inventories were higher than expected saw US light crude close down $3.64 in the biggest one day drop since 2001, and the fall has since continued.
With the January Nymex crude future quoted at 48.79-48.87 at Deal4free, someone who was bearish could have sold the spread at 48.79 for say £10 per point, a position requiring a margin deposit of £1,400. The subsequent collapse in the price took the spread to 43.21-43.29 so that the bet could have been closed at 43.29 for a profit of £5,500.
As an alternative to the normal spread betting markets, IG Index has recently launched daily binary option bets on Nymex crude as well as on the Comex gold and silver markets. 'People can use the binaries to bet on whether these prices will finish the day up or down,' says Imre. 'The unpredictability of these markets makes them a popular choice for binary options.'
The main Nymex trading session begins at 3pm UK time and closes at 7.30pm, although electronic trading is possible ahead of this period. The binary was recently quoted around midday at 40-45 to finish the day up. Betting £10 a point meant that if the market had finished higher the bet would have yielded a £550 profit. The maximum loss, which would have been known when the bet was placed, was £400, though the position could have been closed at any time during the day to restrict this.
There has also been a huge interest in the copper and palladium markets this year. 'Palladium has recently been trading higher because of Russian supply worries, while the price of copper has been pushed up by the massive demand from China,' Hougaard explains. 'Traders can use technical analysis on the commodity markets but they need to understand the factors driving the demand: the hedge funds are big players and have been a big factor in pushing up the prices.'
'Spread betting on these markets means that any profits are tax-free
There is greater flexibility over the size of the exposure than there
is when trading the futures contracts directly.'
Imre says that people go through fads on commodities. 'A month or two back when the Ivory Coast - the main supplier of cocoa - went through a period of civil unrest we saw a lot of interest in this market. The really specialist such as live cattle and bean oil tend to remain largely the preserve of those who have had professional experience of trading these markets.'
Langham agrees, but says that sometimes there is a pick-up of interest in the agricultural markets, as seen recently for example when the sugar price went berserk. 'A lot of clients will rotate into the markets when they see the price movement, but anyone thinking of trading them should make sure they have a fair idea what they are doing before they risk any money,' he says.
Manoj Ladwa, derivatives broker and technical analyst at Tradindex, says that the company has seen some interest in the cocoa, coffee and sugar markets this year, as well as in the precious and base metals, the latter again a consequence of Chinese demand pushing up prices. 'Liquid markets such as these lend themselves to technical analysis, they are also extremely good for people who trade the trend,' he says.
Commodity prices can remain relatively static for long periods but they can also make dramatic moves. The risks are compounded by many of the agricultural commodity markets operating a system of price limits, which means that traders could be locked into mounting losses for several days in a row with no opportunity to cut their positions. A contract that is 'limit down' cannot be sold and one that is 'limit up' cannot be bought. This applies both to the underlying market and the spread bets. One way round this is to use a controlled risk bet or guaranteed stop, which guarantees to close the position at the specified price regardless of market conditions.