Risk appetite and the prices of precious metals

This study formulates and corroborates the hypothesis that investors’ appetite for risk and the prices of precious metals are tightly linked. To assess this appetite for risk, the VIX index, commonly called the fear index, is decomposed into two components: the physical volatility in stock returns (used to reflect economic uncertainty) and the volatility risk premium (a proxy for implied risk appetite). Using the GJR-GARCH and causality models, the study establishes that the prices of precious metals and their volatility are driven by shocks originating in the economic uncertainty and risk appetite of investors that prevail in the equity market. The contribution of shocks to investors’ appetite for risk to price fluctuations in these commodities has become particularly remarkable since the mid-2000s – a leading indication of the financialization of natural resources.