Investors typically buy an asset if they expect its price will go up. However, there is an investment product in the market that enables investors to invest in the opposite direction.
An investment product named “inverse product” offers an investment return equivalent to an inverse daily return of an underlying index (e.g. a stock index or commodity futures index). Among the commodity futures inverse products in the market, some are linked to a crude oil futures index or gold futures index, presenting an alternative for investors to gain exposure to such commodities.
Buy with a bearish view is not simple at all
Buying a crude oil or gold futures inverse product typically means holding a bearish view of the oil or gold price. As such, does it mean that you can make money if the oil or gold price does fall? – unfortunately it is not as simple as that. A commodity futures inverse product is linked to a specified commodity futures index, the performance of which is based on the price of the commodity futures contracts rather than the spot price of the commodity, and the futures contract price may not always go in line with the spot price.
For gold price, for example, the price of the COMEX gold futures contracts (front-month) is different from the gold spot price. The spread has even surged to US$150 in times of market volatility in recent years; for oil price, there is often a spread between the price of the WTI futures contracts (front-month) and the WTI spot price too. In recent years, the spread has even widened to US$5 during market volatility.
Apart from the difference between commodity futures price and commodity spot price, investors should also be aware that commodity futures market is extremely volatile. You may recall in April 2020, the May WTI crude contract plunged into negative territory, diving to a low of negative US$40.32, sending shockwaves to investors worldwide. Sharp price fluctuations in commodity futures are not uncommon. Take commodity futures inverse product as an example, if the futures price moves against your expectation and rises sharply within a short period of time, you may lose most or even all your investment.
In fact, leveraged and inverse products are derivatives that are very different from conventional investment vehicles. They are not intended for holding longer than one day that are only suitable for sophisticated trading-oriented investors with short term trading or hedging purpose. If these products concern investments in commodity futures, they will have the same risk exposures as futures trading, including the risk of rollover of futures contracts, over-concentration in one single asset or futures contract, and the possibility of being subject to coercive measures imposed by the relevant party in respect of its futures positions.
Leveraged and inverse products are not suitable for average investors such as me. Before investing in such leveraged and inverse products, you should read the offering documents carefully and fully understand its features, exposure, operation and risks. If you are in doubt, you should seek professional advice.
