FOLLOWING THE PROFESSIONALS
Though the large commodities funds can be taking position sizes in the hundreds of millions, spread betting and contracts for difference can allow the retail investor to take positions on commodities and still see returns. Taking a position on gold bullion would usually take a huge amount of capital to take advantage of a $10 intraday move – the brokerage costs would wipe out any gains made unless you were taking significant position sizes. But with spread betting you can take a position from as little at £1 a point – giving you the levels of leverage usually only available to institutional traders. By spread betting a mining stock, you can also mitigate the currency risk – since you are buying a derivative and not the underlying stocks, you do not run the risk of having profits wiped out by a strengthening dollar.
On the other side of the coin, you should also follow in the footsteps of the professionals when it comes to risk analysis – at the most basic level by setting stops and limits when you place a trade. The leverage that allows you to take a meaningful position on the gold price, or indeed on any other commodity for that measure, means that you can see your margins ripped through if you do not ensure that you put the right controls in place. By placing a stop loss, should the price of the instrument that you are trading rise or fall beyond a specified point, your order will trigger and the sale or purchase will be made.