Commodity Trading UK Guide 2024

Online brokers in the UK now allow you to trade commodities at the click of a button. This includes everything from gold, silver and oil, to natural gas, and wheat.

In this guide we explore how this particular online investment scene works, what risks and rewards you need to look out for, and how you can get started with a commodities trading account today.

What is Commodity Trading?

Put simply, commodity trading is the process of buying and selling assets like gold, oil, and sugar. In a similar nature to other investment streams, such as stock trading and forex trading, the main objective is to make a profit from rising and falling prices.

For example, let’s say that you wish to trade oil. At $35 per barrel, you think that the asset is overpriced. As such, you place a buy order worth £100. If the price of oil surpasses $35 and you exit the position, you make a profit. Similarly, you might think that the price of gold is overvalued at $1,900 per ounce.

As such, you place a £200 sell order – meaning that you will make a profit if the asset goes down in value. This is the beauty of online commodities trading, not least because you always have the option of going long or short on your chosen instrument. That is to say, even if the wider markets are falling, you can attempt to make a profit by placing a short-selling order.

Additionally, commodity trading is popular with UK investors because of the leverage facilities offered by online brokers. This stands at 1:20 on gold and 1:10 on all other commodities. Crucially, there is no requirement for you to own or store your chosen commodity to be able to trade. Instead, you simply need to determine whether you want to place a buy or sell order, how much you wish to stake, and the broker will take care of the rest.

Let’s look at an example of how commodities trading works in the UK:

• You open an account with an online trading platform that hosts commodities
• You deposit £500 with your UK debit card
• You place a £100 buy order on oil at $35 per barrel
• A few hours later, oil is priced at £39 per barrel – representing an increase of 11%
• You want to cash in your gains, so you place a sell order
• On a stake of £100, you made a total profit of £11

As you can see from the above, commodity trading sites in the UK allow you to exit your position at any given time. In this example, you were able to close a buy order by placing a sell order. If you were short on the asset, you would close the position by placing a buy order.

Ways of Trading Commodities

There are several ways that you can trade commodities in the UK – none of which require you to physically take ownership of the respective asset. This gives you the freedom to choose a tradable instrument that allows you to meet your investing goals.

Some of the most common ways of trading commodities are discussed in more detail below:

CFDs

In a nutshell, CFDs are financial instruments created by online brokers. They are tasked with tracking the value of an asset in real-time.

• For example, if the price of oil is $43.24 per barrel, as is the CFD instrument.
• Similarly, if the value of silver increases by 1.2%, so will the CFD.

Crucially, as the CFD instrument is simply tracking the real-world price of the commodity, you can trade the asset with ease. You are not required to take ownership of the commodity, nor do you need to worry about physically storing it. Instead, all you need to do is correctly predict which way the price of the commodity will go.

Taking the above into account, CFDs can be used to trade virtually every asset class imaginable. As we uncover in more detail later – this includes everything from gold, silver, oil, wheat, sugar, natural gas, and grain.

Additionally, CFDs are ideal for trading commodities if you want to start off with really small amounts. After all, you won’t be taking ownership of the asset, so trade minimums are often just a few pounds.

Read More: How Does CFD Trading Work in the UK?

ETFs

For those unaware, commodity ETFs allow you to invest in a group of assets via a single trade. In the case of commodities, you can directly invest in the future value of assets like gold.

The ETF provider in question will personally purchase and store gold bullion. This means that the value of your investment will go up and down in line with the market value of gold.

This particular option is suited for those of you that wish to invest in a commodity on a long-term basis. This is because the fees associated with ETFs are often sub-0.5% per year. Much like stocks and shares, you can exit your ETF investment at any given time during standard market hours.

Futures

Futures are complex financial instruments that allow you to trade the future price of an asset like gold or oil. In most cases, commodity futures trading contracts have an expiry date of three months – although some shorter/longer markets are also available. Once the futures expire, those holding the contract have a legal obligation to buy or sell the respective commodity.

This is often settled in the underlying commodity, which is why futures trading is reserved for large-scale financial institutions. You can, however, offload your futures contracts at any time before they expire. In terms of making money, you need to predict whether the futures will expire at a higher or lower value than the contract price.

For example, the price of a 3-month futures contract on wheat might be $180 per bushel. If you enter a long position and the wheat contract closes at $190 per bushel, you make money. But, if the contract closes at $170 per bushel, you make a loss.

Options

Much like futures, options are complex financial instruments that allow you to place sophisticated trades. The main benefit is that you can access your chosen commodity trading markets without needing to invest the full amount upfront. Instead, you will be paying a small ‘premium’ – which is like a non-refundable security deposit.

The key difference between options and futures is that the former gives you the right, but not the legal remit to buy or sell the underlying commodity. In other words, if your options trade is not successful – you simply lose the premium. This is often in the region of 5-10% of the contract value.

In terms of orders, options work on ‘calls’ and ‘puts’. If you think the price will increase, you opt for calls. If you think the opposite, you opt for puts.

Options can be confusing for newbie investors, so let’s look at an example.

• You want to trade options on natural gas, which is currently priced at $2.50 per mmBtu
• The strike price of a 3-month contract is $2.60
• You need to determine whether the contract will close at a higher or lower price than the strike price
• You think the price will increase in the coming weeks, so you purchase 1,000 call options
• The premium on the trade is $0.13 – so for 100 contracts your total outlay is $130

When the contracts expire in three months time, the price of natural gas is $2.95 per mmBtu

• This is $0.35 higher than the strike price of $2.60
• You hold 1,000 contracts, so your gross profit is $350 (1,000 contracts x $0.35)
• You then need to subtract the premium, which was $130 (1,000 contracts x $0.13)
• All in all, your commodity options trade resulted in a net profit of $220 ($350 – $130)

As you can see from the above, you were able to access the natural gas market by paying a small upfront premium of just $130. Had natural gas not surpassed the strike price of $2.60 per mmBtu, you would have lost your $130 premium and nothing more. This gives you the chance to trade commodities in a low-risk, high-reward nature.

What Commodities Can You Trade in the UK?

The UK commodities trading space is typically split into three segments – hard metals, energies, and agriculture products. Let’s explore each asset in more detail.

Hard Metals

The most-traded hard metals in the online commodity space are:

• Gold
• Silver
• Platinum
• Palladium

In particular, gold is the most traded commodity globally. This means that you will benefit from large liquidity levels at your chosen broker, alongside tight spreads.

Outside of the traditional trading arena, there are also markets for the following hard metals:

• Aluminum
• Cobalt investments
• Copper
• Tin
• Zinc
• Lead

Very few brokers list the above hard metals.

Energies

As the name suggests, energies consist of natural resources like oil and natural gas. In the case of the former, oil is traded in US dollars, per barrel.

• The main oil market is priced by the Brent Crude Benchmark.
• In the US, the WTI Benchmark is preferred.

Oil prices are dominated by supply and demand, which in itself is affected by geopolitical events. For example, if OPEC decides to cut production levels and thus limit the supply of global oil, then the price of the asset will likely increase.

In the case of natural gas, the market is priced in US dollars, per one million British Thermal Units (mmBtu). Most online commodity brokers in the UK offer markets on natural gas. Its price is often more volatile than oil, so do bear this in mind if you are a newbie trader.

Agriculture Products

Much like hard metals and energies, agriculture products are demanded on a global basis. As such, the value of each product will go up and down in the open marketplace. Consequently, this means that you can trade the future value of agriculture products at the click of a button.

Some of the most popular commodity markets in the agriculture scene include:

• Wheat
• Cocoa
• Sugar
• Cotton
• Soybeans
• Corn
• Coffee

All of the above commodities are priced in US dollars.

Soft Commodities vs Hard Commodities

You might come across the terms soft and hard commodities when trading online. In simple terms, soft commodities are typically related to agriculture products such as soybeans, corn, and wheat. Hard commodities are those that must be extracted or mined – such as oil and gold.

Fundamentals of Commodity Trading UK

While most newbies will opt for traditional, long-term investment arenas like stocks, bonds, or ETFs – the online commodity trading scene offers several benefits over the aforementioned sectors.

These include:

Long or Short

When you invest in a traditional asset such as shares, you typically do so because you think the value of the stock will increase. This limits your ability to profit in the event the company sees its stock price decrease.

However, when trading commodities, you always have the option of going long or short. This is conducive for trading, as the direction of the market is irrelevant if you are able to predict correctly.

For example, in the midst of the coronavirus pandemic, demand for oil was non-existent. Naturally, the value of oil crashed in the open marketplace. Seasoned traders would have no doubt shorted oil via a sell order. The ability to go long or short on your desired asset is something offered by all UK commodity brokers.

Leverage

As we briefly covered earlier, UK investors have the option of applying leverage to commodity trades. As per ESMA regulations, this is capped at 1:20 on gold and 1:10 on all other asset classes. This allows you to trade with significantly more than you have in your brokerage account.

For example:

• Let’s all that you short-sell oil at an order value of £100
• A few days later, the price of oil is now 10% lower
• Ordinarily, you would have made a profit of just £10
• But, by applying the maximum leverage amount of 1:20, your profit is amplified by 20x
• This takes your overall gains from £10 to £200

However, leverage doesn’t come without its drawbacks. Notably, while your gains can be amplified, as can your losses. For example, when trading with leverage of 1:20, this means that you are only required to put up 5% in the margin (1/20=5%). Consequently, if your buy/sell order lost 5% or more in value, the broker would be forced to close the position for you. In turn, the broker would keep your 5% margin.

Diversification Against the Stock Markets

Commodities also allow you to diversify away from the traditional stock markets. Although not an exact science, investors will often turn to commodities like gold in times of economic hardship.

This is because evident during the height of the 2008 financial crisis, whereby the value of gold sky-rocketed.

This is why seasoned investors will typically allocate a portion of their portfolio to precious metals, as it offers an excellent way to hedge against a falling stock market.

Stores of Value

Gold and silver are often referred to as stores of value. In simple terms, stores of value maintain their value as they do not depreciate. Investors turn to stores of value as a way to protect their wealth against the threats of inflation. As noted above, they also provide a way to hedge against a falling stock market. If you wish to access the online commodities space as a means to invest in a store of value, then you might opt for an ETF.

Commodity Trading Strategies

The multi-trillion pound commodity trading scene can be a difficult battleground to navigate through. As such, it is imperative that you have at least one trading strategy to draw from.

Below we list some of the most common strategies implemented by newbie commodity traders.

Support and Resistance Levels

When we refer to the support level of a commodity, this is the price point that historically defends itself from a further decline. For example, let’s say the support level of oil is $25.50. If the price of oil is inching closer to this level, there is every chance that the downward trend will reverse in and around the $25.50-mark.

Resistance levels work much the same way, but in reverse. That is to say, when a commodity is increasing in value, it will often struggle to surpass its residence price point. For example, let’s suppose that silver is enjoying an upward trend, but it is approaching a resistance level of $32. With this in mind, there is every chance that the upward trend will reverse when silver inches closer to $32.

In terms of deploying a strategy to benefit from historical support and resistance levels, the process is relatively straight forward. Once you have identified the support level, you would need to place a buy order just above the respective price. Similarly, you would need to place a sell order just below the residence price point.

As there is every possibility that the support or resistance levels will be broken, it is crucial that you install sensible stop-loss losses. When triggered, the broker will automatically close your position and thus limit your losses.

Technical Analysis

Technical analysis is a fundamental skill that must be mastered if you wish to trade commodities on a short-term basis. For example, day traders will enter a buy or sell order on their chosen market and then exit the position a number of minutes or hours later. In doing so, they will look to profit from small price movements on the commodity.

Swing traders have a bit more flexibility in trade durations. While they might decide to keep a position open for several days, equally, they might hold onto the trade for a number of weeks. This is with the view of aligning their positions with the current market trend.

Nevertheless, whether it’s swing or day trading – you must have the capacity to be able to read and interpret charts. You will need to make use of technical indicators such as the MACD or RSI, which allows you to locate pricing trends that might be in the making.

Risks of Commodities Trading

There are various risks and downsides that you need to be made aware of when trading commodities.

In particular, these risks include:

• Volatility: Commodities like gold and oil are much more volatile than traditional blue-chip stocks. On the one hand, this will benefit seasoned traders, as volatile marketplaces present plenty of profit-making opportunities. However, this might not be suitable for newbie traders. After all, you will experience much larger profits and losses in a short-term timeframe.
• Leverage: In the UK retail trading space, ESMA limits allow you to trade stocks with leverage of up to 1:5. However, gold can be traded at 1:20 and all other commodities at 1:10. While this does have the potential to amplify profits, it can also have disastrous effects if you do not deploy sensible risk management strategies.
• Limited Markets: UK brokers will often give you access to thousands of stocks from various domestic and international marketplaces. This allows you to diversify your portfolio with ease. However, online platforms are somewhat limited when it comes to commodities. In some cases, you’ll only have access to gold, oil, and natural gas. This can lead to being overexposed in a particular commodity.
• No Income: When investing in stocks, you have the potential to earn regular dividends. In the case of bonds, you’ll be earning coupon payments. Either way, this allows you to grown your wealth much faster and enjoy a passive stream of income. However, commodities are not income-generating, so the only way that you can make money is through capital gains.

Be sure to take the above into account before parting with your money.

Commodity Trading

Trading commodities online and making consistent profits is something achieved by very few.

Tip 1: Take a Commodity Trading Course

A way to prepare yourself for the volatile nature of the commodity space is by taking a course. There are heaps of providers active in the online space to suit most requirements.

For example, if you have little to no experience in trading commodities, you’ll want to find an online course that is targeted at newbies.

This will cover the fundamentals of commodities and ensure you have a firm understanding of risk management.

Once you are ready to take things to the next level, you’ll want to consider a more advanced course that targets specific commodity trading strategies.

Tip 2: Read Commodity Trading Books

Don’t make the mistake of limiting yourself to a single UK commodity trading course. Instead, you should supplement your learning journey by reading books.

Some commodity trading books for newbie investors include:

• A Trader’s First Book On Commodities by Carley Garner
• The New Case for Gold by James Rickards
• Mastering the Trade by John F. Carter

On top of commodity-specific books, you should also consider publications that focus on technical and fundamental analysis.

Tip 3: Try a Commodity Demo Account

When it comes to the commodity trading process itself, you are advised to start with a demo account. Most FCA-regulated CFD brokers allow you to open a demo account facility that comes pre-loaded with ‘paper funds’.

This means that you can enter buy and sell positions, apply leverage, and deploy trading strategies without risking a penny. This is an effective way of learning the ins and outs of UK commodity trading in a 100% risk-free environment.

Tip 4: Master Risk Management

Installing risk management strategies will ensure that you keep your potential losses to a minimum. There are several things that you can do in this respect, such as:

• Bankroll Management: Ensure that you limit your stake sizes to 1% of your total bankroll. For example, if you have an account balance of £500, never risk more than £5 per position
• Stop-Loss Orders: Never place a trade without a stop-loss order. This will automatically close your position when your trade is at a loss by a pre-determined amount. For example, if you don’t want to lose more than 1% of your stake, make sure you stop-loss order mirrors this.
• Take-Profit Orders: You should also ensure that you never place a trade without a profit target in mind. You can do this by setting up a take-profit order. For example, if you set your take-profit order up at 3%, your position will be closed automatically when you are 3% in the green.
• Limit Leverage: As tempting as it can be to go ‘gung-ho’ with leverage of 1:20, you should probably avoid trading on margin until you know what you are doing. After all, leverage can result in you losing your entire margin, so tread with caution.

Tip 5: Trade During Standard Market Hours

Unlike stocks and shares, commodities like gold can be traded 24 hours per day, 7 days per week.  However, you are advised to only trade during standard market hours.

In the UK, this is typically between 8 am and 5 pm. In doing so, you will benefit from the highest spreads and higher liquidity levels. In turn, this will reduce your trading costs and ensure that you do not trade in volatile market conditions.

1. IG

IG is a UK broker that offers thousands of tradable markets. In the case of commodities, you can access your choice of instrument via CFDs or spread betting. Both avenues can be traded in a commission-free manner, which makes the platform ideal for targeting small margins. The spread betting option is particularly interested, as all of your trading profits are tax-free in the UK.

In terms of supported markets, you can trade hard metals, energies, and agriculture products. All instruments can be traded with leverage – in line with ESMA limitations. What we also like about IG is that it offers support for MetaTrader 4 (MT4). This means that you will have access to advanced market orders, technical indicators, and chart drawing tools.

MT4 also offers the option of installing a commodity trading robot, which will subsequently place buy and sell orders on your behalf. Additionally, IG also allows you to invest in traditional ETFs, many of which are focused on commodities like gold and oil. This is suitable for those of you that wish to invest in a commodity on a long-term basis. IG requires a minimum deposit of £250, which you can fund with a UK bank account or debit/credit card.

IG fees:

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Conclusion

Commodity trading is getting more and more popular with UK investors. Not only can you trade the future value of assets like oil, gold, and natural gas – but you can choose from a long or short position. You can also trade with leverage of up to 1:20 when trading gold, and 1:10 on all other commodities.

FAQs