Most casual stock market investors don’t pay much attention to the current price of various commodities, like oil, gold, and copper, for example. However, these current prices can have a great influence on the value of the main stock market indices.
Just take a look at the companies in the FTSE 100, for example. This is a weighted index, which means that companies with the largest market capitalisation, such as BP, Vodafone, Glaxosmithkline, have a greater impact on the value of the FTSE 100 than smaller ones.
You will see that the company with the highest market capitalization is BP, whose price is obviously heavily influenced by the price of crude oil. At the time of writing, it also has BHP Billiton, Rio Tinto, Anglo American and Xstrata in 9th, 11th, 20th and 21st places respectively on the FTSE 100 list of companies. These are all mining companies whose share price is determined at largely because of the price of the various commodities.
Right now, the price of several commodities, including copper, gold, lead, nickel and silver, are trading at very high levels both in annual and historical terms. As a result, the share prices of the major mining companies have risen because they obviously make more money selling these products when the price is higher.
The side effect of this is that the FTSE 100, which includes a lot of these mining companies and is actually heavily influenced by them because they all have significant market capitalization values, has gone up as a result of this. At the time of writing, mining stocks are attempting to make new highs and the FTSE 100 is also close to making new highs.
If commodity prices were to drop sharply, you would no doubt see the value of individual mining stocks and the FTSE 100 as a whole drop sharply as well because they are so closely correlated.
So the point I want to get across in this article is that it is very important that you keep an eye on commodity prices because they have a huge impact on the major stock indices. When commodity prices are high, the main stock market will generally also trade high, while the opposite is true when commodity prices are very low. For long-term investors, bargains come when commodity prices are low, but that seems a long way off at the moment.