Precious Metals and the Convenience Yield

Which convenience yield provides investors with the most information, that of gold or silver? The answer is … both.

This study by Chng and Foster (2012) finds that the relationships between the convenience yields (cy) of gold, silver, platinum and palladium are associated with the state of the global economy. Vector autoregression results show that gold’s cy has the greatest cross-market influence. However, sub-sample analysis confirms that the pecking order depends on time, and that the significance of the cy shifts between gold and silver. This is due to a general perception of gold as a safe haven asset and silver as an industrial metal. The cy of silver is highly significant in the returns of all four metals during normal economic conditions. The cy of gold affects the short run changes in volatility of all metals in crisis times. The findings of this study suggest that the lagged cy of both gold and silver could be utilized in a trading strategy to capture abnormal returns.

Method: VAR Estimation

Data: Daily data. Sources: Tokyo Commodity Exchange, LBMA, LPPM, from 1996-2010.

Full Citation: Chng, M.T. and Foster, G. (2012) ‘The Implied Convenience Yield of Precious Metals: Safe Haven versus Industrial Usage’, Review of futures markets, vol. 20, no. 4, pp. 349-394, Institute for Financial Markets, Washington, D. C.

Available at: http://centerforpbbefr.rutgers.edu/2011PBFEAM/Download/AS/AS-15/2011PBFEAM-092.pdf