Fundamentals and Volatility: Storage, Spreads, and the Dynamics of Metals Prices

Abstract

The theory of storage implies that inventory and demand conditions affect (1) the variances and correlations of commodity spot and forward prices and (2) the spread between spot and forward prices. For four industrial metals and one precious metal over the 1986-92 period, the observed relations between the spread and the variances and correlations of spot and forward prices are consistent with the theory. Since the close connection between spreads and real supply-and-demand conditions is well documented, the results strongly suggest that fundamental factors determine the dynamics of metals prices. Copyright 1994 by University of Chicago Press.