The UK is host to some of the world’s largest commodity markets.
a). In 2020, the London Metal Exchange traded $11.6m trillion of metals such as copper, lead and aluminum.
b). 20 million troy ounces of gold are traded each month by members of the London Bullion Market, with an approximate market value of £26.2 billion.
c). ICE Futures Europe, a London-based derivatives exchange plays host to oil futures and the trading of other soft commodities such as coffee and cotton.
London, and the UK more broadly, is a natural home for commodity exchanges because of the advantage conferred by its geographical location. The advantage comes in the form of a time zone that sits comfortably between the US and Asian market timezones.
Trading of commodities can therefore begin in Asia, transfer to London at 8:00 am Greenwich Mean Time and later move to the Chicago Mercantile Exchange (CME) in the US, which opens in the mid-afternoon UK time.
These exchanges are home to professional trading and clearing hours, which are fed orders by institutional traders and commodity brokers.
How to trade commodities in the UK
As a retail trader, you will not be admitted as a member broker to the prestigious exchanges mentioned in our opening paragraph. The fees to do so are prohibited, and some exchanges even place limits on the number of member brokers who are permitted to trade directly on the exchange.
At the CME, where in-person ‘outcry’ trading was still part of the trading process until the pandemic hit in 2020, membership was naturally constrained by the physical space of the ‘pit’ in which the traders worked.
Instead, you’ll work with a UK-based commodity broker who will execute trades for you. Behind the scenes, your broker will either place trades directly on the market or will feed them through an intermediary who will place them on your behalf.
All popular UK commodity brokers offer software or browser-based trading platform which acts as an interface between you and the broker.
Trades are rarely accepted over the telephone due to the additional processing costs involved. However, most British traders don’t pine for phone calls as they enjoy the clarity and immediate feedback they receive from an electronic trading system that can visually confirm the trade about to be made and give instant confirmation that a trade has been executed.
Investors interested in gaining exposure to commodities without trading on a professional derivatives platform have other options to diversify their portfolio:
- Exchange-Traded Commodities
- Exchange-Traded Funds (Physical)
- Private holdings of precious metals
- Precious metals held on deposit
- Equity investments in commodity producers
These investments are accessible through a standard stockbroker account available to all retail investors, or through a specialist precious metal trading company, of which there are many based in London.
Hopefully, this article has demonstrated that to a UK investor, there is an abundance of options available to help you tap into the exciting commodity markets.