Business Cycles and the Behavior of Metals Prices

TLDR

The theory of storage predicts that convenience yields fall with increasing inventory, leading to lower futures volatility than spot when inventories are low, similar volatility when inventories are high, and inversions of normal futures‑spot relationships near business‑cycle peaks. The study aims to test the storage‑theory hypothesis by analyzing spot and futures price variability for metals. The authors examine the relative variation of spot and futures prices across metals to assess the hypothesis. They find that demand shocks at business‑cycle peaks lower inventories, producing large convenience yields and price inversions as predicted.

Abstract

ABSTRACT The theory of storage says that the marginal convenience yield on inventory falls at a decreasing rate as inventory increases. The authors test this hypothesis by examining the relative variation of spot and futures prices for metals. As the hypothesis implies, futures prices are less variable than spot prices when inventory is low, but spot and futures prices have similar variability when inventory is high. The theory of storage also explains inversions of “normal” futures‐spot price relations around business‐cycle peaks. Positive demand shocks around peaks reduce metal inventories and, as the theory predicts, generate large convenience yields and price inversions.