Metal Futures: Protecting Investors from Price & Volatility Risk - Essay Sample

Introduction

Metal Futures has a long history of attracting everyone from banks to individual private traders. The widespread popularity of these deals is their purpose in protecting buyers and sellers from the risk of price and volatility, as well as in allowing investors to pursue opportunities. Alquist and Coibion (2014) argued that gold is the most popular investment and the trading option of all the precious metals in the markets. Gold has been hovering around its highest prices since futures trading on commodities began almost half a century ago in 1974 (Alquist & Coibion, 2014). Although the price level has risen, there has been no action around gold. Volatility in gold products has risen slightly and is actually lower than its historical average. As gold counts to new highs, the volatility in its metallic partner silver has almost doubled. The gold market has attracted a lot of attention recently, and gold prices have been fluctuating over the years. Therefore, the purpose of this study is to examine the price co-movement and volatility of the metal futures market for gold (Bain, 2013). The significance of this study comes from the uncertainty and volatility in the context of the potential factors affecting the price of gold due to the lack of accurate analysis on the future gold market, gold stimulus as well as market trends. Studies suggest that the price of gold is affected by exchange rate fluctuations and the global gold rate, the most important factors affecting the recent volatility in the international gold market.

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Research Questions

• Does economic data affect the volatility of gold prices?
• Does currency fluctuation affect gold prices?
• Does supply-demand balance affect gold prices in the future metal markets?

Research Objectives and Statement of Problems

• To investigate how economic data affects the volatility of gold prices.
• To examine how currency fluctuation affects gold prices.
• To investigate how supply-demand balance affect gold prices in the metal future markets.

The researcher will focus on reaching the above goals as a way of solving the questions. Finally, the study will have been successful in solving a major research problem; research on the price co-movement and volatility of the metal futures market.

Literature Review

Effects of Economic Data on Volatility of Gold Prices

Economic data is one of the drivers of gold prices. Baklaci et al. (2018) argued that economic data such as wage data, manufacturing data, job reports, and broad-based data such as GDP growth impact the fiscal policy decisions of the Federal Reserve, which in turn affects gold prices.

Although it is not set in stone, a strong US economy such as low unemployment, increased jobs, productive expansion and gross domestic product (GDP) growth of more than 2% have a tendency to lower gold prices (Batten & Lucey, 2008). On the flip side, weaker job growth, rising unemployment, weakening productive data and GDP growth on the sub could raise interest rates and push up gold prices

How Currency Fluctuation Affects Gold Prices

The movement of currencies - especially the US dollar and the gold price against the dollar - has had another significant impact. The US dollar has a propensity of outperforming prices of gold as the value of other currencies and commodities around the world rises as the dollar falls (Lin et al., 2008) In contrast, the strong US dollar often falls due to the growing US economy (Christenson, 2014). Besides, it lowers gold prices and is inversely related to the US dollar. For example, the weak US dollar in 2016 played a key role in further raising gold prices.

Effects of Supply-Demand on Gold Prices in the Metal Future Markets

Deaton and Laroque (2003) argued that the economics of general supply and demand also affect physical gold prices in various ways. Just like for services and goods, high demand with low supply, and the propensity of pulling prices (Katz & Holmes, 2008). Conversely, high supply prices of service or good with constant or weak demand can be reduced.

In accordance with the World Gold Council, the demand for gold rose by 15% to 2,335 tonnes in the first half of 2016, while investment demand peaked at 16% from 2009 (Deb et al., 1996). Though, the supply of gold amplified by only 1% in the first half, which was a representation of the sluggish growth rate of the first half supply since 2008. Frankel (1984) argued that rising demand and restricted supply have led to fluctuations in gold prices.

Significance of the Study

The realization of the study will have substantial input to knowledge. The results of the research problem and the subsequent analysis will offer to enlighten to economists in several ways. For one, it will enhance an in-depth understanding of the co-movement and volatility of the metal futures market, especially for gold (Gotthelf, 2005). This can be measured in the perspectives of the probable application in various aspects of applied economics. Besides, Greer (2000) argued that the knowledge gained will be valuable in understanding the interplay between co-movement and volatility in the metal futures market. This will be important in understating the general nature of the economic landscape of the metal futures market.

Research Methodology

The research will exploit a quantitative method of data collection, as the method focuses on statistical and numerical analysis of data in addition to objective measurement (Martin and Bridget, 2012). The quantitative methods of data collection that will be used by the researcher include surveys and questionnaires. The main reason for the choice of quantitative approach depends on the realism of the whole process, which emanates from the fact that the quantitative research method exploits the primary data as opposed to the qualitative method, which makes its results more reliable and accurate (Teo, 2014). The development and application of theories, mathematical models, and hypotheses related to metal future markets will be the main objective of the quantitative approach. According to this case, the measurement process will be necessary because it proposes a substantial relationship as well as a relationship between empirical observations and quantitative relationships that can be expressed mathematically (Martin and Bridges, 2012).

Quantitative research will be significant as it will assist in the comprehensive investigation of various aspects of the metal future markets at any given time, along with specific factors that affect the volatility and price of gold. The meaning of the result will then examined and expressed through text and data.

Furthermore, numerous published journal articles will be reviewed to boost effective comprehension of various aspects of metal futures market especially for gold. Moreover, a comprehensive study will be done on the internet from various sources with the main intention of acquiring the best methods of examining the interplay between price co-movement and volatility of the metal futures market.

References

Alquist, R., & Coibion, O. (2014). Commodity-price co-movement and global economic activity. NBER working paper, 64(04), 135-165. https://doi.org/10.3386/w20003

Bain, C. (2013). Guide to commodities (1st ed., p. 322). Wiley. Retrieved from https://www.investopedia.com/investing/commodities-trading-overview/

Baklaci, h., Süer, ö., & Yelkenci, T. (2018). Price linkages among emerging gold futures markets. The Singapore Economic Review, 63(05), 1345-1365. https://doi.org/10.1142/s021759081650020x

Batten, J., & Lucey, B. (2008). Volatility in the gold futures market. Applied Economics Letters, 17(2), 187-190. https://doi.org/10.1080/13504850701719991

Christenson, D. (2014). Gold Value and Gold Prices From 1971-2021 (1st ed., p. 344). Balboa Press. Retrieved from https://www.amazon.com/Gold-Value-Prices-1971-Empirical/dp/1452517061

Deaton, A., & Laroque, G. (2003). A model of commodity prices after Sir Arthur Lewis. Journal of Development Economics, 71(2), 289-310. http://doi.org/10.1016/S0304-3878(03)00030-0

Deb, P., Trivedi, P. K., & Varangis, P. (1996). The excess co-movement of commodity prices reconsidered. Journal of Applied Econometrics, 11(3), 275-291.Retrieved from https://www.jstor.org/stable/2285065

Frankel, J. A. (1984). Commodity prices and money: Lessons from international finance. American journal of agricultural economics, 66(5), 560-566. Retrieved from https://ideas.repec.org/a/oup/ajagec/v66y1984i5p560-566..html

Gotthelf, P. (2005). Precious metals trading (p. 204). Wiley. Retrieved from https://www.investopedia.com/articles/basics/09/precious-metals-gold-silver-platinum.asp

Greer, R. J. (2000). The nature of commodity index returns. The journal of alternative investments, 3(1), 45-52. https://doi:10.3905/jai.2000.318924

Katz, J., & Holmes, F. (2008). The goldwatcher (1st ed., p. 232). John Wiley. Retrieved from https://www.amazon.com/Goldwatcher-Demystifying-Gold-Investing/dp/0470724269

Lin, H., Chiang, S., & Chen, K. (2008). The dynamic relationships between gold futures markets: evidence from COMEX and TOCOM. Applied Financial Economics Letters, 4(1), 19-24. https://doi.org/10.1080/17446540701262868

Martin, E. & Bridgmon, K. (2012) Ruantitative and statistical research methods: from hypothesis to results, 1. Aufl. edn, Jossey-Bass, Somerset. Retrieved from https://b-ok.africa/book/2557032/307df9?regionChanged=&redirect=1673765

Teo, T. (2014) Handbook of quantitative methods for educational research, brill | sense, Rotterdam. Retrieved from https://www.springer.com/gp/book/9789462094048

Weldon, G. (2007). Gold trading boot camp (1st ed., pp. 233-344). John Wiley. Retrieved from https://www.amazon.com/Gold-Trading-Boot-Camp-Commodities/dp/0471728004