Commodities

What a commodity CFD is

A commodity CFD tracks the price of a physical good without any of it changing hands. The broker prices it from the futures market or from the spot market for metals, and the trader takes a leveraged position on the price with the broker as counterparty, in exactly the way a forex CFD works. The contract sizes differ: a standard lot of gold is 100 troy ounces, of silver 5,000 ounces, of crude oil 1,000 barrels, though many brokers quote oil in smaller units. The retail leverage caps in Europe and Australia allow 1:20 on gold and 1:10 on other commodities.

The main ones

• Gold, quoted as XAU/USD, is the most traded commodity at retail brokers and behaves partly as a currency, moving on real interest rates, the dollar and demand for safety. It trades almost round the clock on weekdays with a short daily break.
• Silver, XAG/USD, follows gold with more volatility, because it is a smaller market with an industrial demand component.
• Crude oil, as WTI and Brent, moves on supply decisions by producing countries, inventories, demand forecasts and geopolitics, and has wider spreads and more frequent gaps than the metals.
• Natural gas, copper, and agricultural commodities such as wheat, corn, coffee and sugar are offered by many brokers, with wider spreads, lower leverage and, for the agricultural ones, seasonal patterns and expiry effects that catch out traders used to currencies.

What is different from forex

Three things. Commodity markets have opening hours and daily breaks, so a CFD can gap at the open in a way a major currency pair rarely does. The underlying for most commodities is a futures contract with an expiry, and a CFD priced from it either rolls to the next contract, with an adjustment that can surprise a trader holding through it, or is based on a cash price the broker calculates; the futures and CFDs article explains the mechanics. And the swap on a commodity CFD is set by the broker rather than by an interest differential, and is usually a charge in both directions.

What to check before trading one

The contract size and the pip or point definition, because they vary by broker. The trading hours and the daily break. The swap, and whether the instrument is excluded from swap-free accounts. Whether the price is from a futures contract, and if so when and how it rolls. And the margin, which many brokers raise before events such as an OPEC meeting or an oil inventory report. The site's broker pages record the commodities each broker offers and the terms it publishes for them.