Oil and gold have traditionally been the most popular commodities for spread betting clients. But, in the past three months, news coverage of rising food prices has sparked renewed interest in “soft” commodities such as coffee.
Hard commodities, especially precious metals, are still being frequently traded by private clients speculating on short-term price movements, and by traditional equity investors seeking refuge from uncertain equity markets.
Stock market volatility, the weakness of the US dollar and concerns over inflation helped push the gold price to $845 an ounce in November, its highest level in 28 years. Traders and industry executives are forecasting that gold prices will exceed this next year. Some even see a price tag of $1,000 an ounce as a distinct possibility.
Oil prices have also climbed steeply with prices expected to remain high in the near future. In 2003, the price of oil averaged $31.5 a barrel. Four years later and the average so far for 2007 is $72.5 a barrel. At present, Societe Generale and Deutsche Bank predict the average price per barrel for 2008 will be $80.
“If you work on the basis that what comes out of the ground cannot be put back in, then there is likely to be a shortage of hard commodities,” says David Buik at Cantor Index. “And therefore it’s unlikely that, over the next two or three years, commodities will do anything but go up.”
But although sentiment regarding oil and gold are bullish, both are experiencing short-term corrections.
At the time this article went to press, gold was trading around $784 an ounce. A slight recovery in the dollar and high oil prices were preventing it from rising at any significant pace.
Oil had also fallen back, to below $88 a barrel, ahead of the meeting of Opec in Abu Dhabi, after almost reaching $100 a barrel a week ago. Copper, nickel and lead have slipped back too.
“Although the long-term objectives of hard commodities are going up – thanks largely to the rampant demand from emerging markets – they do not tend to go in a straight line,” says Mr Buik.
Consequently, spread betters can be caught on the wrong side of short term corrections, despite having a good long-term plan.
“A lot of people who have put in stop losses are cut out when these commodities move around – as they have in the last week – and you can lose a fortune,” says Mr Buik.
Some investors began shorting oil when it reached $90 a barrel. “We had a lot of orders to sell if oil reached $100 a barrel,” says Joshua Raymond, sales trades City Index. “It’s a psychological barrier – many felt that if it reached that amount it would be too expensive and the price would have to come down.” But those speculators who have turned their attention to soft commodities need to be just as careful. Volatility can be even more pronounced in the prices of agricultural products.
Soft commodities, sugar, coffee and cocoa for example, and agricultural commodities – such as wheat, soy and corn – have all experienced dramatic price rises in recent months.
In October, the director-general of the UN’s Food and Agriculture Organisation said that increases in wholesale prices were being passed on to consumers, which was creating social problems for some countries.
Soya bean prices have risen to their highest level in 34 years, trading at $11.14 a bushel at the end of November. The price of wheat rose to a record high of $9.61 a bushel in October, as a result of strong global demand and a poor harvest.
In addition to food demand, driven by the increased wealth of populations in developing economies, there has been increased interest in agri-fuels as a source of clean energy. The growing middle class in India and China are now purchasing greater quantities of meat and dairy products, while countries such as the US are using crops such as corn and soya beans to produce biofuels as they seek to reduce their reliance on overseas oil.
But while some analysts predict that a rise in agricultural and soft commodity prices will continue, others warn that the boom could precede a depression: high prices encourage farmers to plant more crops one year, and this, in turn, leads to lower prices the following year.
Another problem for spread betters is the fact that there can be a paucity of timely knowledge about soft commodities, resulting in bets being made on the basis of out of date information. “Often, information on soft commodities in particular is not talked about until it is too late,” says Simon Denham, managing director of Capital Spreads.
“But people have been showing a real interest in soft commodities and it does look like it’s getting interesting again. They came down from a mid-summer rally but now they are looking bullish again.”
Gold, silver and oil are still the most popular commodities for spread betters. But, as food prices rise and fund managers predict the beginning of a 20-year bull market in agricultural products, soft commodities are likely to be increasingly attractive to the spread betting community.
