At one time the commodity markets were only open to professional futures traders but now these fast-moving prices are readily accessible to anyone with a spread betting account. This makes it possible to speculate on diverse areas such as gold, silver, oil and coffee, alongside more familiar items such as shares and stock indices. Spread betting on a commodity entails buying or selling the spread in exactly the same way as it does with a share or index. These are, however, highly specialist markets and anyone planning to trade them needs to understand how they work.
Trading commodities is not for the faint of heart; it can be very profitable but it can also be very costly if you end up on the wrong side of a trade. Many commodities have different trading hours and tick movements so its important that you are familiar with these intricacies before starting out.
Most of the commodity quotes are based on the associated futures contract, with the spread betting provider simply wrapping their spread around the underlying price. The two most notable exceptions are the daily spot gold and silver bets, as these expire against the cash price of these precious metals.
At any given time, the cash price of a commodity will normally be lower than the associated futures price. This is because the latter includes a fair value premium, which reflects the financing charge from trading on margin and the cost savings of not having to store the physical commodity. In consequence, the futures are always 'fairly' priced in relation to the cash price. This fair value premium erodes over the life of the contract and represents a cost to all long positions.
One of the biggest pluses with spread betting is that it is possible to speculate on areas like commodities without having to take too big a position. With gold, for instance, the minimum bet can be as low as £10 per dollar/troy ounce. If the market is trading at $700 per ounce, this equates to an exposure of £7,000 whereas one futures contract would be worth $70,000.
Some of the commodity futures markets are open almost round the clock, during which time they experience a mixture of open outcry and out of hours electronic trading. COMEX Gold futures contracts, for example, are traded in the pit from 1.20pm to 6.30pm UK time and then electronically from 7pm to 1pm the following day. The spread betting hours will generally be the same, which means it will normally be possible to bet on these markets at almost anytime of day from Monday to Friday.
With any spread bet it is important to check how and when the position is settled. This is particularly true with commodities as many of the bets actually expire in the month before the named contract month. For example, a bet on July Coffee Robusta may actually close on the last business day of June. This is to give the spread betting provider an opportunity to unwind any hedging positions that they may have taken in the underlying futures markets before they get too close to expiry.
Commodity markets such as cocoa, coffee, sugar, oil and copper are traded in both the UK and the US, which means there are two distinct spread bets available. If one is more liquid than the other, as with Sugar No.11 in New York versus Sugar No.5 in London, it makes sense to trade where the volume is greatest.
A spread betting firm will be able to advise on this. In some cases, both markets will be equally liquid and the prices will tend to move in tandem. This is true of light sweet crude oil in the US and Brent Crude in London.
A strong dollar may be good for some of London's companies which generate most of their earning overseas but is generally bad for commodities. Commodities are priced in USA dollars so when the value of the US currency increases, it will take less dollars to buy the same quantity of commodities. This can impact demand from other non-dollar buyers who due to their reduced relative purchasing power.
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