Rising food costs getting you down? Try a spread bet
A spread bet on commodities offers you an excellent opportunity to get even, according to Katie Hope
You would have had to have spent the past year in a cave not to be interested in commodities. For car drivers, the price of petrol is an ever-growing concern, while rising food prices have caused riots in Haiti, Egypt and Bangladesh, to name just a few countries. Rising wheat and rice costs, which have soared by 130 per cent and 217 per cent respectively in the past year, are now even hitting London, with some restaurants being forced to pull certain types of rice from the menu.
This kind of profile is attracting spread betters, who have spotted an opportunity to make some money from the sharp rises, as well as the chance to diversify their portfolios away from the increasingly dire and unpredictable performance of the equity markets.
Spread betting firm CMC Markets, for example, estimates average monthly transactions across all commodities (including oil and softs such as grain), are six times higher than a year ago.
In fact, commodities are one of the most traded financial instruments on global exchanges with the high volume and value of transactions giving investors exposure to a very liquid market. Commodity derivative exchange the Chicago Mercantile Exchange, originally founded as the Chicago Butter and Egg Board, for example, processed 211.7m contracts worth $127.14 trillion during the first half of this year.
One of the key attractions is the fact that these markets are near impossible to access as cheaply in any other way. Buying the physical stuff, in the case of gold via bullion coins or bars for example, is pretty pricey and, crucially, not very liquid.
“Commodities – particularly the more unusual ones, palladium, pork bellies etc – are typically difficult to gain exposure to through more conventional routes. In this respect spread betting has a huge advantage,” says Tim Hughes, head of sales at spread better IG Index.
Manoj Ladwa, derivatives broker at TradIndex, points out that cash is also more practical.
“There’s no risk of finding a truck load of live cattle on your front lawn as all contracts are cash settled.” A more serious point is that spread betting also opens up the commodities market to smaller clients, with opening bets typically as small as £1 per point. As spread bets are traded on a margin you can also increase your exposure to a certain instrument or market at a relatively low cost. Currently, with most commodities priced in US dollars, and spread bets denominated in sterling, the weakening dollar also offers potential upside. A $10 move in the gold price, for example, will mean a £10 profit or loss for someone betting at a £1 a point.
Another appeal for motorists is the fact that you can also protect against paying more at the petrol pump by buying crude oil on a spread bet.
“Clients who up until now have not gone short on equities are seeing the benefits of going short and opening up positions,” says Craig Inglis, market strategist at CMC Markets.
In spite of the attractions, however, the fact that commodities are influenced by so many factors – including random and unpredictable events such as climate, disease, political instability as well as the general economic health of a particular region – means it’s not an arena for beginners. While you can make a lot of money fast, on the flipside you can lose a lot of money just as quickly. It’s not uncommon for crude oil prices to change up to $10 in one day, for example.
“You have to know a bit about technical analysis otherwise it will trip you up,” adds Inglis.
But with rising fuel prices leading inflation ever upwards, the opportunity to get even with a spread bet is almost irresistible. Just make sure you do your homework first.