THIS year’s financial headlines have been dominated by uncertainty around the world. The turmoil in the Middle East and north Africa has led to long-term supply worries in this oil rich area, and the continuing fears over the Eurozone sovereign debt crisis have had investors seeking out safe havens. Combined with the weak greenback, these global events have pushed dollar-denominated commodities, especially oil and precious metals, to new highs.
US crude and oil product inventories are reported to be at their lowest levels since 2008, and with Opec member Libya being battered by peace-keeping bombing raids, oil prices are holding a large risk premium. Brent crude is still above $120 a barrel as a weaker dollar and pressure on US crude stocks indicated that prices have the potential to climb much higher.
Gold has been the biggest benefactor of the global uncertainty. The weak dollar has seen the yellow metal take its place as the favoured haven currency. The markets have seen flight into the de facto currency with each earthquake, revolution and Moody’s downgrade. Since the start of the year, prices have risen over eight per cent, with the price for a troy ounce hitting a new record of $1,518.6 yesterday.
Though UK investors may be rubbing their hands together in excitement at the prospect of cashing in on these gains, there is a barrier to surmount. According to David Jones, markets analyst for IG Index, “we’ve seen gains across the board for dollar denominated commodities, but the upside if you’re trading in a second currency can be somewhat limited. Taking a look at gold for example. On April 1, gold opened at $1,432 an ounce and ended last week at $1,507. Over the same time, it only rose from £893 to £910.”
Adrian Ash, head of research for BullionVault, also voices the same concerns for UK investors: “If the dollar weren’t sinking, gold would be pretty much flat from the start of the year, only just breaking $1,400 today. This week’s big jump has been entirely unwound in terms of the euro, yen, Swiss, Canadian and Aussie dollar.”
IG Markets presents a way around this issue for investors trading in sterling. The CFD provider has recently started offering clients the ability to trade dollar denominated commodity CFDs in sterling, eliminating the dollar part of it. This covers the highest profile instruments only (gold, oil et cetera) but removes the exchange rate risk and allows clients to focus purely on the underlying direction of the market.
With the dollar likely to remain in its current state until at least the third quarter, savvy investors can continue to gain through CFDs.