Analyzing Precious Metals Returns Using a Kalman Smoother Approach

Abstract

This study analyzes the sensitivity of different external factors to the returns of the precious metals of gold, silver, platinum and palladium. The goal is to find similarities and differences between the dependencies of every factor to each metal as well as study the sensitivities in a time-varying framework. For that, a brief co-integration test for the precious metals is conducted followed by a Kalman smoother approach to study the sensitivities. All results point to strong time-dependencies, such as a declining relationship of gold to equity volatility. Consistent strong relationships can be identified for the CPI and the dollar while market data such as equity prices or bond yields only selectively relate to the precious metals. A Dynamic Time Warping approach finally compares sensitivities for pairs of precious metals to a specific factor and finds higher similarities between platinum and palladium compared to other pairs.