On Saturday February 27, a powerful earthquake struck Chile, causing a significant loss of life and damage to the country’s infrastructure.

The earthquake also had the effect of disrupting commodity markets, in particular the market for copper.  This is an important concept when doing stock market research.

Commodity prices are sensitive to a number of different factors.  Demand for commodities is one factor that can drive up commodity prices.

Another factor is a disruption, or threat of disruption, to the supply of commodities.  In economics, a shortage of supply leads to higher prices for a good.

Commodity markets work in a similar fashion, as a shortage in the supply of a resource tends to bring up its price. This highlights the importance of economic fundamentals in any stock market research.

Chile accounts for 30% of the world’s copper reserves, and its share of global production is 35%.  This makes Chile an important player in the market for copper.

When the earthquake struck there were reports that the country had suspended some copper production.  However, most copper mining was done in areas outside of the quake zone, so production was not materially affected.

This didn’t stop copper prices from soaring after initial reports of the earthquake, as the mere threat of a copper shortage was enough to drive up its price.

So when conducting stock market research, remember that there doesn’t need to be an actual disruption in commodity supply for prices to rise, just the threat of disruption is enough.

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Investing in commodities first requires that you take an opinion on a commodity. For example, you might like the look of a “safe” commodity – one that does well when the market is floundering – and choose gold. Silver is also a safer commodities bet, and a good hedge against inflation and other major world events.

If you believe the economy is strengthening, you might choose copper, which is considered a proxy for the strength and direction of the overall market. Or you might decide to invest in oil if you’ve noticed it going upwards, or agricultural commodities such as coffee, cocoa, and cattle.

These days when people ask themselves how to trade or buy commodities, CFDs looks like a good option for Aussie traders. Rather than buying, trading or investing in the commodity itself, you’re making a bet on the movement of the commodity – whether it will rise or fall. In this case, you’ll use a CFD provider (such as CommSec) to place an order on the commodity, putting in your entry orders, your stop orders, and your take profit orders.

However you may decide that investing in commodities directly is a more lucrative option, and trade global futures from Australia with a non-CFD broker.  That is, you need to find an Australian futures broker who can trade on US (and other) futures markets for your commodity of choice.

The ASX trades futures over grain, electricity and wool, as well as options over grain futures. Futures are traded on DTP, the Derivatives Trading Platform (aka CLICK).

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