Financialization of metal markets: Does futures trading influence spot prices and volatility?

The emerging financialization of commodity markets over the last decades has led to an intense public and scientific debate about commodity investing and its implications. Although metal commodities are indispensable to industry and the economy, the influence of financialization on metal spot prices and in particular on respective volatility has been insufficiently studied. Therefore, we attempt to contribute to existing literature by examining potential effects of the lead-lag relationship on futures trading activity of commercial and non-commercial market participants and cash prices and volatility for the major metal commodities: copper, gold, silver, platinum, and palladium. After analyzing Commitment of Traders (COT) reports from the U.S. Commodity Futures Trading Commission (CFTC) over a timeframe from January 1993 to December 2013, bi-directional Granger-causality tests and an EGARCH volatility analysis show that there is hardly any influence of trading activity driving metal spot prices in the long-term, but rather driving volatility to some extent. We find indications of price and volatility influencing effects of trading activity within sub-samples, such as phases of booms and crises. Contrary to public perception, commercial and long positions affect price levels and volatility far more than activities of non-commercial traders. However, for the reverse direction there is strong evidence that commodity prices and volatility drive trading positions.