How to trade commodity prices locally

If you’ve been reading my column for the last couple of weeks, you should be familiar with exchange trades funds or 'ETFs'.

November 21, 2016

2 minutes read

I have illustrated the benefits and simplicity of trading them and how cost effectively you can create diversity, in terms of investment risk.

Last week I explained how you can literally own the world, through locally listed offshore ETFs – and that you can buy them in rands through using a simple plain vanilla trading account.

This week I would like to expand on the ETF theme, by showing you how you can get exposure to commodities just as easily.

In order to invest in baskets of commodities, investors often choose to trade in exchange traded notes or ETNs.

These are similar to ETFs in that both are designed to track an underlying asset – and both trade on the major exchanges just like stock.

Here’s the important difference

When you invest in an ETF, you are investing into a fund that holds the asset it tracks.

An ETN is more like a ‘promissory note’.

It’s an unsecured debt note issued by an institution.

So really what that means, is that the underwriter is saying to you: “I promise to pay you the value of the asset”.

This means that if the underwriter (usually a bank) were to go bankrupt, the investor would risk default.

Luckily in South Africa, our listed ETNs are underwritten by the major banks who have the best credit ratings, so this risk is dramatically reduced.

So what can an ordinary person trade?

So now we have that explanation out of the way, here is how you can get exposure to commodities using your local trading account in rands.

Anybody who listens to their car radio, at one time or another, would have heard the news reader say something like “and now for your market indicators…”.

They then rattle off currency prices, gold platinum and oil prices.

But have you ever thought about trading these “prices”?

We have 12 commodity linkers and ETNs listed on our stock exchange, which track either the performance of the commodity futures contract you wish to trade, or the spot price of the commodity (in rand terms).

From copper to corn to the obvious oil, platinum and gold.

Included in the list of ETNs are trackers of palladium, silver and even wheat.

All of the “linker” notes derive their prices from the NYMEX (New York Commodities Exchange).

Simply put, the price of the note needs to be linked to “something” and that “something” needs to be traded on an exchange.

This exchange is where the futures contracts on commodities, are listed.

These include: gold, WTI oil, platinum, palladium and silver.

What makes ETNs attractive to local investors, is that they’re able to get exposure to a range of commodities without having to exchange their currency.

The conversion is done in the price and we get to trade dollar-based commodity prices in rands, in our very own local share account.

As usual, I’m always happy to engage with you and should you need any details of the products I discuss, you can always reach me through benonicitytimes@caxton.co.za