Hedging Against Gas, Petrol And Other Commodity Price Increases
Higher petrol prices have sent UK inflation upwards again and that means that the
Governor of the Bank of England, Mervyn King, might have to sharpen his pencil and write to the Chancellor if the trend persists.
There is a strange rule in the UK whereby if inflation is too high, or too low, the Governor has to personally send a letter to the Chancellor explaining why. One hopes that they employ more modern techniques elsewhere at The Bank.
Looking further into the inflation numbers and you can see that not only has a decline in the Pound led to higher petrol prices, which has therefore contributed to the increased rate of inflation, but many retailers were reluctant to pass on the UK VAT increase straight away. As the retailers have been gradually (re)introducing that VAT increase, that has had a lagging effect on prices getting higher. So, it is not just overall inflation that is on the up, but core inflation (stripping out energy and food prices) is too.
In the UK, Petrol (Gas) at the pump is as expensive now as it has ever been. That just shows how much influence currency fluctuations can have on every day life. The last time prices were at these levels was when the price of crude oil was above $140 a barrel in July 2008. At the moment, crude oil is priced at a little over half that level. Add a few small tax increases and we are paying extreme levels due to the fall of the GBP/USD exchange rate.
The decline in Sterling has made UK imports a great deal more expensive and whilst consumers on the whole have struggled with the recession they now have to contend with ever increasing prices. Not the sort of thing that the incumbent government will want to see as support for them continues to ebb away.
There are, of course, ways to hedge this. You could have a spread bet on the price of crude oil to rise and/or
spread bet on the GBP/USD rate to fall.
As a tool for speculating, spread betting has a number of advantages over other traditional options like buying and selling shares. As just pointed out, spread betting offers a wide range of worldwide markets so that investors are not just limited to stocks. You can trade currency pairs, commodity prices, stock market indices and interest rates.
Spread betting also allows investors to bet on an assets value to either increase or decrease. With normal share trading you are limited to speculating on a stock to increase. A spread bet also lets you bet on stocks and shares, oil, gold etc to go down.
So in theory, you could hedge your bets against any further price increases. However note that as with all investments such as trading shares, funds, pensions, housing etc, you can lose money. With spread betting you can lose more than your initial investment.
Also spread bets are suited to short term trades, anything from 5 minutes to 3 months. Whilst I like the fact that you are trading directly with a
spread betting company and there are no broker's fees or commissions, there is however, a small charge for every extra day that you keep your trade running. After 1-2 months these charges start to add up.
So please do note that spread bets carry a high level of risk. Ensure that spread betting matches your investment objectives. Familiarise yourself with the risks. Where necessary, seek independent advice.
If you want to trade a variety of markets over short periods then spread betting is worth exploring. If you want to hedge against long term price increases it is probably not the best tool.
Like the English you may just have to put up with the price increases and display a stiff upper lip.
by: Robert Thomas
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