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The implied convenience yield of precious metals: safe haven versus industrial usage

journal contribution
posted on 2012-01-01, 00:00 authored by M Chng, G Foster
During a financial crisis, investors find it convenient to hold gold (Gd) as a safe haven. But during good economic times, manufacturing firms find it convenient to stockpile platinum (Pl), palladium (Pd) and especially silver (Si), for industrial usages. We have three related objectives. First, we examine the nature of cross-market interactions among the convenience yields (cyit) of {Gd, Pl, Pd, Si}, which are implied from cost-of-carry relations. Second, we test if the more influential cyit of certain precious metals are also affecting the return, volatility and/or volume dynamics of other precious metals. Third, we analyze if the cyit of gold is enhanced (diluted) during (after) the Asian and Global financial crises. We find, consistent with our propositions, that during crisis period, gold’s cyit provides incremental information to the volatility series of {Gd, Pl, Pd, Si}. But during good economic times, it is silver’s cyit that has the most influence on the return series across {Gd, Pl, Pd, Si}. This is not surprising given that Si has the largest proportion of industrial usage among the four metals.

History

Journal

Review of futures markets

Volume

20

Pagination

349-394

Location

Washington, D. C.

ISSN

0898-011X

eISSN

1933-7116

Language

eng

Publication classification

C1 Refereed article in a scholarly journal, C Journal article

Copyright notice

2012, Institute for Financial Matters

Issue

4

Publisher

Institute for Financial Markets