Commodity Spread Betting
In the past the main interest in spread betting has centered around stocks and stock markets. Now with greater news coverage of commodity prices such as oil, gas and gold, there is a growing interest in the opportunities offered by these markets. The most common commodities that spread betting companies offer are:
- Agricultural products: wheat, coffee, orange juice, sugar and cocoa
- Metals: copper and aluminum
- Precious metals: gold, silver and platinum
- Energy: crude oil and gas.
Traders will often specialize in one of these products and build up an expertise in that area such that they become confident about predicting future price movements. When people talk about trading commodities they are generally talking about the commodities futures market. A future or futures contract is an agreement to buy a certain quantity of a product at an agreed date. These contracts help both producers and buyers to minimize their risks. A farmer can make an agreement to sell a certain tonnage of wheat in 6 months and get a fixed price at harvest time regardless of whether the price crashes. A refinery can guarantee a delivery of oil at a set price insuring against future rises. These contracts often get sold on as conditions change and hence we have a futures market. Speculators have always got involved in this market, making money on the price movements. Spread betting commodities offers an easy way for anyone to share in some of these opportunities.
Advantages of spread betting commodities:
- No need to worry about delivery of oil or wheat because you are not getting involved with making a contract, just betting on it.
- Small minimum bet compared to the minimum commodity futures contract which can be tens of thousands of pounds.
- No need to buy in multiples of the minimum contract.
- Spread betting on ommodities offer 24 hour trading whereas stock markets and stocks can be limited to opening hours.
- Commodity prices can never plummet to zero as there is always a demand for the product. Shares on the other hand can suddenly become worthless as a company becomes bankrupt.
- No risk due to currency fluctuations as compared with trading in foreign stocks and stock markets which can leave you vulnerable to currency movements.
- Commodity prices are governed by the laws of supply and demand which can be easier to predict than stocks and shares.
Commodity betting strategies
Technical analysis
Technical analysis is a method of predicting price movements by studying charts. Commodity trading is very much suited to this approach because the prices are largely governed by the laws of supply and demand and this creates predictable patterns and trends. The first step before starting commodity betting is to learn the basics of technical analysis.
Seasonal opportunities
Seasonality often plays a part in determining prices for commodities in regular cycles throughout the year. Normal increases and decreases in supply and demand for particular commodities seem to occur every year in fairly consistent patterns. Commodity seasonal patterns can be an effective trading strategy for commodities, but remember seasonal tendencies are just that: tendencies.
Soybeans tend to move higher seasonally from February and peak in June. Much of the anxiety over crop losses diminish once the crops are in the ground and this is wrapped up normally by early June. Prices tend to drop during the summer if there are no major weather problems e.g. prolonged drought and major floods. Grain prices tend to drop and bottom out during harvest, which is around October.
Develop an expertise
There are any number of factors that affect commodity prices, and if you are prepared to study these influences you will eventually become a good judge of where prices are likely to move. Take copper for example. In the 1990s the demand for copper was increased due to China's expansion and electrification. Another example would be oil production where prices have been driven up and down with the changing geo-political tensions in the Middle East. Those with sufficient understanding of Chinese industrialization or Middle Eastern politics would have been able to cash in on their expertise by betting on the commodities markets.