| The key to successful investing is developing your | | | | representation across entire commodity sectors |
| knowledge in the markets and to take things | | | | and different geographic regions. |
| slowly and methodically. Commodities trading is no | | | | Futures |
| different. It is an exciting market which, if you are | | | | A futures contract is an agreement to buy or sell |
| preapred to put in the time and effort, can be | | | | your chosen commodity at a specific date in the |
| very lucrative, but always be aware that risks | | | | future - at today’s prevailing market price. |
| lurk in the shadows just like any other | | | | These markets are highly liquid and the contracts |
| investment. | | | | can be sold on again at any point before the final |
| Physical Trading | | | | delivery date, i.e. the day when the farmer or |
| Physical commodities trading is buying and selling | | | | miner will deliver the raw materials to the person |
| the actual commodity itself not some sort of | | | | holding the contract. |
| derivative instrument like a futures contract. | | | | The producers and end-users are still present in |
| There are obvious downsides to this method | | | | today’s markets, but it is the traders and |
| namely storage costs, insurance costs and | | | | speculators who are now responsible for most of |
| shipping costs. | | | | the volume that keeps the market liquid. |
| The physical market, for our purposes, focuses | | | | The main benefit of trading futures is that you |
| on those commodities that are easily stored, | | | | are making a direct investment into the underlying |
| bought and traded for the average investor. | | | | raw material and your future profit or loss is |
| These are such things as Gold, Platinum, Palladium | | | | entirely dependent upon fluctuations in the |
| and Silver. | | | | underlying commodity price. |
| The most popular method of trading such items | | | | Going back to leverage, most futures trading is |
| on a retail basis is in the purchase of coins. There | | | | done ‘on margin’, which dramatically |
| are many companies on the web that provide | | | | increases potential profits (and losses, remember). |
| services for the purchase of coins for collectors | | | | Shares |
| and speculators. | | | | Exposure to the commodities market can be |
| The internet, of course, has given investors many | | | | gained from buying and selling companies whose |
| options for the purchase, storage and trading of | | | | business it is to mine, distribute or trade in |
| gold coins however, our favourite example of | | | | commodities that you are interested in. |
| trading gold on the web is Bullion Vault. They allow | | | | The shares are, generally, liquid and accessible for |
| the purchase and storage of gold in small | | | | trading, the problem, however, is that there are |
| quantities and have an efficient trading system. | | | | many other factors that could effect the share |
| They hold $290mn of gold for clients and appear | | | | price that may not have anything to do with the |
| to have a very good reputation. | | | | underlying commodity. These could be |
| Leverage | | | | management issues, cash flow, macro economic |
| If you didn't know the term 'leverage' before the | | | | issues and geo-political issues. |
| current financial mess, you do now. For those | | | | CFDs and Spread betting. |
| who need a refresher, here is how it works. | | | | CFDs and Spread betting are easily accessible |
| Let’s say you buy £100,000 of gold and | | | | trading instruments which are essentially |
| whomever you buy it off only needs you to put | | | | derivatives of many of the above, however |
| down a 10% deposit, £10,000. Let’s say | | | | spreads and dealing costs can be harsh to |
| gold goes up 10%. You now have gold worth | | | | investors. |
| £110,000, if you sell it now you pay back the | | | | Technical Phrases |
| £90,000 you borrowed and you get your original | | | | You will hear such phrases as 'contango' and |
| £10k back along with your £10k profit. Basically | | | | 'backwardation'. |
| you have turned a 10% gain in the price to a | | | | Contango is a term used in the futures market to |
| 100% gain on your investment. | | | | describe an upward sloping forward curve (as in |
| Obviously if the price dropped 10% you lose your | | | | the normal yield curve). One says that such a |
| money, hence the mess that some are in at the | | | | forward curve is "in contango" (or sometimes |
| moment. | | | | "contangoed"). |
| Physical Commodities on Leverage. | | | | Formally, it is the situation where, and the amount |
| There are still some companies around that | | | | by which, the price of a commodity for future |
| provide leverage on physical commodities across | | | | delivery is higher than the spot price, or a far |
| a range of products, however, the costs | | | | future delivery price higher than a nearer future |
| associated with trading, such as interest on loans, | | | | delivery. |
| storage and insurance fees have made the | | | | Backwardation is a futures market term: the |
| product less attractive to the active trader. | | | | situation in which, and the amount by which, the |
| Having filled a gap in the market for some time | | | | price of a commodity for future delivery is lower |
| the product was overtaken by some of the | | | | than the spot price, or a far future delivery price |
| instruments mentioned below. | | | | lower than a nearer future delivery. One says |
| ETFs (Exchange Traded Funds) | | | | that the forward curve is "in backwardation" (or |
| More accurately described as 'Exchange Traded | | | | sometimes: "backwardated"). |
| Commodities' these instruments take into | | | | Commodities trading has many aspects that set it |
| account all the fees such as storage etc | | | | apart from trading other markets and for those |
| associated with trading. They trade like shares are | | | | that become learned in the trading of the |
| liquid. | | | | instruments it can be lucrative. Commodity |
| An Exchange Traded Commodity is an | | | | traders over the last few years have seen huge |
| investment vehicle that tracks the performance | | | | swigs in price which have lead to large profits (and |
| of an underlying commodity or basket of | | | | no doubt some large losses). |
| commodities. ETCs work on exactly the same | | | | Currently the global market in commodities is in a |
| principle as ETFs – with the ETC tracking the | | | | state of flux. Gold, for example, is seen as a safe |
| performance of a single underlying commodity or | | | | haven against inflation and uncertain times, hence |
| a group of associated commodities. Single | | | | it recent volatility. |
| commodity ETCs follow the spot-price of a single | | | | Having worked in commodities for some years it |
| commodity, whilst 'index-tracking ETCs' follow the | | | | was always noted that volatility is our friend, |
| movement of a group of associated commodities, | | | | whether a price is going up or down there is |
| such as cattle, energy or livestock. | | | | money to be made, when commodities are flat |
| ETCs offer the commodities trader a number of | | | | there is not much action and the cost of trading |
| inherent advantages without the associated | | | | out ways the potential profits. |
| vagaries of trading an individual stock: | | | | For the foreseeable future volatility is definitely |
| Direct exposure to the commodities markets | | | | here to stay. Stock market issues and global |
| – the value of your investment will rise and fall | | | | recessionary fears on the one side and continued |
| in direct proportion to the price of the underlying | | | | development of emerging markets using vast |
| commodity. | | | | amounts of the world resources on the other, will |
| Liquidity - ETCs are ‘open ended’ | | | | see volatility in this market for many years to |
| securities, which are created and redeemed | | | | come. This, therefore, as a market to learn about |
| on-demand. This means that the supply of ETCs | | | | and trade ,is a very interesting and potentially |
| is unlimited and that price changes will accurately | | | | lucrative proposition. |
| mirror developments in the price of the underlying | | | | As with all trading, however, there is a very real |
| commodity. | | | | possibility that trading commodities, especially on |
| Stamp duty & CGT - ETCs are not shares | | | | leverage, could lose your portfolio a lot of money |
| and so trades are exempt from stamp duty. | | | | and you should be aware that it is highly risky. Do |
| Furthermore, ETCs can be traded within ISA | | | | not risk more money than you can afford to lose |
| accounts, allowing you to shelter your profit from | | | | and make sure you have a system that allows |
| Capital Gains Tax. | | | | you to use limits and stops to contain this risk. |
| Low dealing costs - ETCs are traded on the | | | | The online trading system available from HF |
| regular stock exchange, making them both | | | | Markets allows you to trade all of the above with |
| accessible and affordable – they can be | | | | assistance, if required, from a professional |
| traded through your share dealing service for a | | | | regulated broker who can guide your initial trading |
| commission. | | | | strategies and help you become familiar with |
| Portfolio diversification – ETCs give broad | | | | trading this exciting area of investment. |