Copper Spread Betting
Copper is often mentioned as an economic barometer of the economy and is considered the benchmark commodity for global economic activity. When you are copper spread betting, you need to be clear on what constitutes a unit or point for your bet. The price is commonly quoted with 5 digits, numerically 10,000 times the price per lb in US dollars, and the “point” is the fifth digit. For instance, IG Index are currently pricing high grade copper at 35815 – 35855. If you are bullish on copper, you might place a £2.50 long bet at the “buy” price of 35855.
The two biggest global consumers of copper are China and the USA. The copper market has been supported by a market shortage and the market is unlikely to move into surplus mode until the end of 2013, if not 2014 and even then this surplus is likely to be of modest proportions. Lack of stability and economic turmoil in countries and industrial disputes are likely to aggravate the supply problem in coming years and although a number of new projects are starting in Chile, these are mainly intended to substitute falling producion at current operational mines in the country. Analysts are predicting that copper price are likely to average $8,500/tonne in 2013.
On the other hand commodity demand is intrinsically linked with economic growth and pictures of copper stockpiles have influenced investor thinking that, not only is China slowing but a big commodity price decline is occurring too. China in particular makes up about 40% of global demand for copper, so economic numbers from the country can trigger sharp moves in the metal price. If one considers that global mine supply could increase by more than 6% in 2015, the medium-term outlook doesn’t look too good for the copper price. Longer term, we might see a deceleration in supply growth which would be positive if this puts the market into deficit.
Analysis of the Copper Price [June 2013]
But let’s take a trading example. Suppose the price goes up to 36115 – 36155, you could close the winning spreadbet and work out your profit like this: –
The bet was placed at 35855, and was closed at 36115, which means you gained 36115-35855 = 260 points. The bet pays out £2.50 per point, so you won 260 x 2.50 = £650.
The price of copper is volatile, and it might have dropped instead of going up, leaving you with a losing bet. If it went down to 35682 – 35722, you could close your bet and accept your loss, before it got any worse. Then you can figure your losses like this: –
The bet was placed at 35855, and was closed at 35682. The number of points lost is 35855-35682, which is 173 points. At your original stake of £2.50 per point, the amount you lost is 173 x £2.50, a total loss of £432.50.
When you are spread betting copper, it pays to look for strong price moves. The spread is usually quite large, which means that you have a lot to make before you even get into profit. For instance, in the examples above when the price went up 300 points you made £650; when it came down 133 points, less than half, you still lost £432.50, which is much more than half of £650. This is the simple mechanics of spread betting, and illustrates why you should search for spread betting providers who offer small spreads.
For another view on this, suppose that you had taken a short or selling position in the above example for the same stake, and the price had moved as detailed.
Your losing trade when the price went up would have cost you 36155-35815 points, which is 340 points, worth £850. But your gain when your bet turned out to be correct and the price went down would have been 35815 minus 35722. That is 93 points, which with your stake of £2.50 per point is just £232.50.
When spread betting you are always looking for the strongest price moves to maximise your profits; this example serves to emphasise that reason. Because the price of copper is so volatile, you may expect to be able to find good spread betting opportunities that are profitable. You should always look for a bet that gives you a greater amount when you win than the amount you stand to lose when it goes against you. That way, even if you are only right half the time, you will still make a profit overall.
If traders perceive China will continue to struggle to meet its growth targets then selling copper on rallies is the way to profit from that.
How to Spread Bet Copper
Many people think of the precious metals, such as gold, when investing their money, but the base or industrial metals, such as copper, tin, and others, can provide excellent opportunities, too. These metals are always in demand because they are needed to make all sorts of things, and consequently are constantly being used up, and mined and refined to replenish the stocks.
Copper is one of the most widely traded industrial metals since it is widely considered as a benchmark of the health of the manufacturing industry. The price of copper at the moment is in the thirty to forty thousands, and you need to be clear what this means. Copper is about US$8000 per ton, and the quoted price is in dollars per lb to four decimal places. The number includes the four decimal places, making the price of copper $3 to $4 per lb. When spread betting, the unit you bet on is the fourth decimal place, or simply the fifth digit.
In these troubled economic times traders and investors are turning more to physical objects because of doubt over “fiat” currency. A slide in the value of money, and in particular the dollar, is equivalent to a rise in price. Copper will benefit from this flight to material things. But there are other influences affecting the price of copper in the shorter term. For instance, China has been buying up supplies much more quickly than previously.
Some say that this is a consequence of the greater industrialization of its economy, but other commentators believe that it is more a financial manipulation. At present, supplies of copper are being “used up” more quickly than it can be mined and refined. But the BBC report that the “use” may simply be warehousing the metal, rather than incorporating it all in manufacturing of pipes, wires, etc.
When the manipulation, if there is any, is unwound in the future, there could be a glut of copper on the market, causing the price to plummet. Regardless of whether the copper is actually consumed, whenever there are large surges or drops in price, for whatever reason, it is prudent to expect that the price will pull back later, so you need to keep a close eye on the market and protect your capital by carefully sizing your bets.
So it looks as if the long term view is for the red metal to increase in price, but in the short term, which is where spread betting is most useful, it may have some hesitation and even fall back. When determining your trading strategy, you will have to take these factors and the demonstrated volatility of copper’s price into account. Use technical analysis to gauge the mood of the market, and be prepared to play either direction on a breakout from a trading range. Looking at the copper chart, you will see that it can play games by gapping open, and has recorded both a 4 “thousand” and an 8 “thousand” gap in 2011. If you are nervous about this, then the additional cost of a Guaranteed Stop Loss may be worth paying for your peace of mind.
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