The shine of precious metals around the global financial crisis

Abstract

We analyze the price behaviour of the main precious metals -gold, silver, platinum and palladium -before, during and in the aftermath of the 2007-08 financial crisis. Using the mildly explosive/multiple bubbles technology developed by Phillips, Shi and Yu (2015, International Economic Review 56(4), 1043-1133), we find significant, short periods of mildly explosive behaviour in the spot and futures prices of all four metals. Fewer periods are detected using exchange-rate adjusted prices, and almost none when deflated prices are used.We assess whether these findings are indicative of bubble behaviour. Convenience yield is shown to have little efficacy in this regard, while other fundamentals proxy variables and position data offer only very limited evidence against prices having been anything other than fundamentals-driven. Possible exceptions are in gold in the run-up to the highpoint of the financial crisis, and in silver and palladium around the launch of specific financial products. Some froth, however, is reported and discussed for each metal.JEL classification: C22; D84; G13

Testing for Mild Explosivity and Bubbles in LME Non‐Ferrous Metals Prices

“…Chosen proxy variables thought to represent economic fundamentals allow the results, when set in the context of a rational asset pricing model, to be assessed in terms of whether or not periods of mild explosivity are consistent with departures from each metal's fundamental value. In addition to PSY's application to the S&P500 index and Coakley et al 's () to crude oil prices, the PSY procedure has already been applied to the Hong Kong residential property market (Yiu et al , ), food commodity markets (Etienne et al ., ) and precious metals prices (Figuerola‐Ferretti & McCrorie, ).…”

“…The LME steel billet contract was only launched in 2008 and trades very low volumes, while futures trading in iron ore began only in 2010. Precious metals, which are closely linked to monetary sector assets, form a separate, asset class that has been considered by Figuerola‐Ferretti & McCrorie (). Prices for minor metals are quoted by a number of price reporting services, but these markets are thin, and when supply is abundant, prices change at infrequent intervals.…”

Testing for multiple bubbles in the copper price: Periodically collapsing behavior

“…The sharp price surge is primarily attributed to the depreciation of the U.S. dollar and financialization of commodity markets. In early November 2010, the second round of quantitative easing policy led to the substantial depreciation of the U.S. dollar, providing enormous impetus for the international copper market to ascend to a price peak (Figuerola-Ferretti and Mccrorie, 2016). Given that the U.S. interest rate was maintained at an extremely low level, large amounts of funds flowed into commodity markets, moving the prices of commodities including copper out of line with fundamentals (Baffes and Savescu, 2014).…”

“…The important role of speculation is increasingly highlighted in promoting bubble behaviors since copper commodities are regarded as investable assets (Figuerola-Ferretti and Mccrorie, 2016). Commodities are broadly included in investment strategies, for the superiority of low correlations with equities and bonds, diversification benefits of portfolios and effective hedging properties against inflation (Hammoudeh et al, 2013).…”

Quantitative Easing and Exuberance in Stock Markets: Evidence from the Euro Area

“…A deviation from the fundamental value and exuberance have a different meaning in this paper. A deviation from the fundamental value refers to the level of a variable, whereas exuberance refers to an explosive change in the variable (1 st difference).10 For housing prices seeAfsar and Dogan, 2018;Engsted et al, 2016;Pavlidis et al, 2019;Fausch and Sigonius, 2018;Pavlidis et al, 2016;Huang and Shen, 2017; for REIT indices seeEscobari and Jafarinejad (2016); alternative energy stock market seeBohl et al (2015); for oil prices seeCaspi et al, 2018;Pavlidis et al, 2013;Sharma and Escobari, 2018;Su et al, 2018 for exchange rates seeBettendorf and Chen, 2013;Jiang et al, 2015;Hu and Oxley, 2017; for the Bitcoin seeCheung et al, 2015;Corbet et al, 2018 and for precious metals (gold, silver, platinum and palladium) seeFiguerola-Ferretti and McCrorie (2016).11 More information on these indices can be found on https://www.msci.com/countries-heat-map. Note that the indices reflect the market capitalization of the different stocks.…”