Metals: resources or financial assets? A multivariate cross-sectional analysis

Abstract

Metals are very important resources for industrial production, but recently they have attracted more and more attention from investors. While certainly industrial producers, consumers, and financial investors do have some influence on metal price development, the role of relevant price factors is not yet quite clear. Therefore, in this paper we examine the explanatory power of various fundamental factors and characteristics known from financial markets, specifically on the expected returns in a unique data sample of 30 metals. We applyto our knowledge for the first time in this contextthe widely accepted method of characteristicsorted portfolios, extended by the very recent method of two-way portfolio sorts as an alternative to classical multivariate regressions. This mostly non-parametric approach, combined with portfolio aggregation, provides very robust results. Our major finding is that the financial characteristics value and momentum have a very high predictive power for monthly returns of metal portfolios. Metal-specific fundamental factors like stocks, secondary production, apparent consumption, country concentration, mine production, or reserves perform depending on the interpretation moderately well or rather poorly, regarding some economically interpretable transformations and when using multivariate two-way sorts. Hence, from the perspective of expected returns, metals are predominantly assets, while fundamental metal-specific factors still play a non-negligible role. Thus, to a much lesser extent, metals can still be regarded as resources. Overall, the combination of financial characteristics and metal-specific fundamental factors yields the best results. With these robust results, we hope to contribute to a better understanding of metal prices and their underlying factors.

How about selling commodity futures losers?

“…Momentum profit was first documented in the U.S. stock market by Jegadeesh and Titman (); however, the literature has since accumulated evidence of the momentum phenomenon in other markets, including the commodity futures market (Asness, Moskowitz, & Pedersen, ; Erb & Harvey, ; Kang & Kwon, ; Lutzenberger, Gleich, Mayer, Stepanek, & Rathgeber, ; Miffre & Rallis, ). In this paper, we examine a momentum strategy in the investment universe consisting of the commodity futures markets as well as the stock market.…”

Precious Metals and Oil Price Dynamics

“…In recent decades, gold and silver, the two most valued precious metals, have been recognized as important financial assets. According to the study, the widespread trading of these precious metals has greatly enhanced their liquidity, boosting their marketability (Frankel, 1987;Lutzenberger et al, 2017;Shammugam et al, 2019).…”

Causality between metal prices: Is joint consumption a more important determinant than joint production of main and by-product metals?

“…Over the past few years, commodities such as metals have been realized as financial assets, with a significant increase in terms of investment and trading volume over the past years (Frankel, 1986;Lutzenberger et al, 2017). Pair trading is an example of a trading strategy of metals, in which different positions on two different metals can be taken simultaneously and is a popular strategy among hedge fund traders (Huang Z. and Martin F., 2017).…”