The emerging financialization of commodity markets over the last decades has lead to an intense public and scientific debate about commodity investing and its implications. Although metal commodities are indispensable to industry and the economy, the influence of financialization on metal spot prices and in particular on respective volatility has been insufficiently studied. Therefore, we attempt to contribute to existing literature by examining potential effects of the lead-lag relationship on futures trading activity of commercial and non-commercial market participants and cash prices and volatility for the major metal commodities: copper, gold, silver, platinum, and palladium. After analyzing Commitment of Traders (COT) reports from the U.S. Commodity Futures Trading Commission (CFTC) over a timeframe from January 1993 to December 2013, bi-directional Granger-causality tests and an EGARCH volatility analysis show that there is hardly any influence of trading activity driving metal spot prices in the long-term, but rather driving volatility to some extent. We find indications of price and volatility influencing effects of trading activity within sub-samples, such as phases of booms and crises. Contrary to public perception, commercial and long positions affect price levels and volatility far more than activities of non-commercial traders. However, for the reverse direction there is strong evidence that commodity prices and volatility drive trading positions.
The growing demand for high-tech products has resulted in strong growth in demand for certain minor metals. In combination with production concentrated in China, this caused strong and unpredicted price movements in recent years. As a result, manufacturing companies have to cope with additional risks. However, the detailed reasons for the price development are only partially understood. Therefore, we analyzed empirically which determinants can be assigned to price movements and performed an event study on the hightech metals neodymium, indium, and gallium. Based on our dataset of news items, we were able to find coinciding events to almost 90% of all price jumps (recall). We showed that if any information about these events occurred with a probability of over 50% there would also be a price jump within 10 days (precision). However, the classical set of price determinants has to be extended for these specific markets, as we found unorthodox factors like holidays or weather that may be indicators for price movements. Therefore, we hope that our study supports industry for instance in performing more informed short-term planning of metals purchasing based on information about specific events.
The investment volume for commodity indices has increased rapidly over the past years. This financialization is intensively discussed in politics and science with mixed results because of several problems. We use a novel idea to measure the effect of the growing investment volume of index investors by looking at index rebalancing, in which only financial traders are forced to trade. Analyzing 289 rebalancing between 2006 and 2021 for the BCOM and the S&P GSCI, we observe significant results-with abnormal returns up to 14.1%-only for open interest and volume data. We cannot prove an effect on prices and, therefore, no effect of financialization on the real economy.
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