Three ways to play rising commodity prices

published 8 February 2011

All eyes are currently on oil. Unrest in Egypt, that has threatened to spill over to the rest of the Middle East, sent oil prices spiralling over $100 a barrel last week, though they have since slipped back.

Meanwhile, other commodities, from copper to the agricultural 'softs', continue to climb. But whether you are a bull or a bear some think prices will slip quickly once the Middle Eastern turmoil subsides what's the best way to play commodities? Here are three options.

Exchange traded funds

Exchange traded funds (ETFs) offer a relatively cheap and easy way to track individual commodities or baskets of them. You buy a share and it follows the relevant commodity price, saving you the hassle of trying to buy the commodity itself. But be careful most commodities are priced in dollars so a sterling ETF will suffer exchange rate risk. And many do not follow the underlying commodity. Instead they are priced off the relevant derivative contracts. That can lead to some big performance deviations between the commodity's spot price and the ETF.

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Spread bets on commodities

This is a fast way to place a bet directly on your chosen asset whether that be oil, cotton or wheat. What's more you can easily alter bet sizes to magnify gains or losses for only a small outlay (the "gearing" effect). And many spread bets are cheap the gap between bid and offer prices can be narrow on popular trades. Better still you can pairs trade say bet on the gap between Brent Crude and West Texas Intermediate narrowing or widening. So far so good. But watch out here too commodities are highly volatile. You need to know your market and use stop losses to limit the damage. If that sounds a bit hairy, here's a third option.

Spread bet oil shares

If you are used to spread betting equities, why not use this type of bet to play commodity prices? For example an upbet on BP is effectively an upbet on the oil price. Meanwhile companies such as Deere and Co or Syngenta offer exposure to rising agricultural demand. Sure you'll still need to keep your wits about you, watch your bet sizes and use stop losses to limit any fallout. But for spread betters who want some exposure to commodities without playing the market directly this could be the best bet.

Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.

He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.