Who trades commodities though? Originally it was producers – those companies that were selling commodities into the market – and their consumers. A typical example of a producer today would be a mining company like Rio Tinto that digs base metals out of the ground, and a consumer might be a ship builder, who needs to ensure a steady supply of metal at an affordable price. Alongside these are the traders, looking to make money from changes in commodity prices.
Commodities markets have become much more affordable for private investors. Once, you had to be able to afford to buy at least one commodities futures contract on a big exchange in order to get the direct benefit, but this could cost thousands of pounds. The only alternative was buying shares in a company, like a mining company for example, that would benefit in a rise in the commodity price. With financial spread betting , however, it is now easy to trade a wide range of commodities markets by opening a spread betting account.
Spread betting companies quote prices on many of the more popular commodities markets. These include precious metals, like gold and silver, energy markets like oil and natural gas, base metals like copper, and agricultural commodities like cocoa, lumber or wheat.
The most popular commodities you can trade with financial spread betting are oil and gold. Oil is often considered a good benchmark of the health of the overall global economy: traders believe that when the economy is doing well, more oil will be consumed, and the price will go up.
Gold meantime is considered a measure of confidence (or the lack of it) in the global economy and paper currencies: as the economic picture deteriorated from 2007 onwards and confidence ebbed, the price of gold crept up. Traders and investors were losing trust in banks, in governments, and in the strength of major paper currencies like the euro and the US dollar. Gold, of which there is only a limited amount above ground, is meant to be able to hold its value during periods of economic instability, when other currencies can lose value as a result of inflation.
While most users of spread betting and CFD’s who trade commodities tend to focus on gold and oil, it can be worth following other commodity markets as well. For example, cocoa has been in the news recently because of the prospect of a bad harvest in West Africa, driving the price to a 33 year high!
When trading commodities, spread betting and CFD’s work just the same as with other markets. With spread betting, you are attaching a stake (for example, £2) for every point the price moves, either up or down. With CFD’s you are trading the price of the commodity and benefiting from the price move, depending on which direction you think it will go. You also have the added advantage of trading commodities on margin: only depositing a portion of the overall value of the trade with the spread betting company, but taking on the whole profit or loss instead.
Each commodity is measured differently, and consequently priced differently. Each commodity is priced per unit – the cost to buy a barrel of oil, or a troy ounce of gold, or a bushel of wheat for example. You should study the historic behaviour of that price to see just how volatile it is before risking any money: like with other financial markets, some commodities can move through wider price bands than others.
There is one other advantage of trading commodities with spread betting or CFD’s: unlike, say, buying a share in a gold mining company, which will only do well if the price of gold goes up, with a spread bet or contract for difference you can profit if the price goes down by placing a ‘short’ or ‘sell’ trade. While spread betting and contracts for difference do not allow you to own actual gold or oil or other commodities, they can let you trade the price of these commodities as they go up or down.
You will sometimes see commodities-based spread bets quoted with a date next to them (e.g. September 2010). This is the month the current contract that the spread bet or CFD is based on will expire. Commodities futures exchanges list contracts that entitle the holder to take delivery of the actual physical commodity (including live cows, ingots of metal, or barrels of oil) when the contract expires, and at the expiry price. This is great if you need to get hold of it, but not so good if you are a trader just wanting to profit from price changes. Luckily, as a financial spread betting client, you are one step away from this problem: a spread bet or CFD will track the price of the contact without the danger of your having to look for a warehouse to put a truckload of coffee in!
