Metal volatility in presence of oil and interest rate shocks

This study uses three “two factor” volatility models of the GARCH family to examine the volatility behavior of three strategic commodities: gold, silver and copper, in the presence of crude oil and interest rate shocks. The results of the standard GARCH models suggest that gold and silver have almost the same volatility persistence which is greater than that of copper. The CGARCH estimates indicate that the (short-run) transitory component of volatility converges to zero much faster for copper than for gold and silver in this sequence. However, the permanent volatility component demonstrates equally strong persistence in the long-run for all three metals. The EGARCH results suggest that the leverage effect is present and significant for copper only, implying that gold and silver can be good investment in anticipation of bad times. Past oil shock does not impact all three metals similarly. Monetary policy and to leaser extent the oil shocks have calming effects on precious metals but not on copper if the T bill rate is used. Crises such as the 2003 Iraq war heighten metal volatility. These results have implications for derivatives valuations, using gold as a reserve asset, risk analysis, and for the commodity-exporting countries and commodity-producing firms.