Exchange-Traded Products Investing and Precious Metal Prices

Abstract

The recent increase in precious metals prices has been partly attributed to the strong flows into related Exchange Traded Products (ETPs) and thus there are growing concerns that ETPs’ flows are distorting prices away from their fundamentals. Literature on the relationship between commodity investing and commodity prices is fast growing, but the current study is the first academic attempt to examine directly the impact of ETPs on the underlying metal returns.

This paper attempts to empirically investigate whether the introduction of precious metals ETPs affects the respective spot prices. In particular, the impact of the investment flows in twenty eight products on the prices of gold, silver, platinum and palladium is tested. The empirical findings of this study suggest that there is a strong statistical significant positive contemporaneous relationship between the inflows and outflows in the precious metals ETPs and the returns of the underlying metals. This interdependence raises the risk of potential severe redemption pressures on certain types of ETPs in cases of market turmoil, which could in turn hurt the large asset managers and banks active in this market.

Keywords: Exchange Traded Products, gold, silver, platinum, palladium

JEL Classification: G10, G19