Does speculation affect spot price levels? The case of metals with and without futures markets

Research output: Chapter in Book/Report/Conference proceedingChapter

Abstract

This paper finds no evidence that speculative activity in futures markets for industrial metals caused higher spot prices in recent years. The empirical analysis focuses on industrial metals with and without futures contracts and is organized around two key themes. First, I show that the comovement between metals with and without futures contracts has not weakened in recent years as speculative activity has risen. Specifically, the annual and quarterly price growth rates of the two metal categories have been positively correlated with their growth rates experiencing a structural shift by the end of 2002. This comovement is driven by economic fundamentals because world GDP growth is strongly correlated with metal price growth, especially after 2002. The structural change in 2002 is also consistent with supply and demand information found in industry newsletters. In the second set of results, I focus more directly on financial speculation and spot price inflation. I use the S&P Goldman-Sachs Commodity Index returns to proxy for the volume of speculative activity and I show that these returns are unrelated to metal prices. The final test follows storage models, which suggest that speculation can affect spot markets only if it leads to physical hoarding. Focusing on metals with established futures markets, I find no evidence of physical hoarding because inventory growth is found to be negatively correlated with price growth rates.

Original languageEnglish (US)
Title of host publicationThe CFTC and Issues in Commodity Futures
PublisherNova Science Publishers, Inc.
Pages145-169
Number of pages25
ISBN (Print)9781616682194
StatePublished - 2010
Externally publishedYes

ASJC Scopus subject areas

  • Social Sciences(all)
  • Economics, Econometrics and Finance(all)

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    Korniotis, G. (2010). Does speculation affect spot price levels? The case of metals with and without futures markets. In The CFTC and Issues in Commodity Futures (pp. 145-169). Nova Science Publishers, Inc..