Metals: resources or financial assets? A multivariate cross-sectional analysis

Metals are very important resources for industrial production, but recently they have attracted more and more attention from investors. While certainly industrial producers, consumers, and financial investors do have some influence on metal price development, the role of relevant price factors is not yet quite clear. Therefore, in this paper, we examine the explanatory power of various fundamental factors and characteristics known from financial markets, specifically on the expected returns in a unique data sample of 30 metals. We apply—to our knowledge for the first time in this context—the widely accepted method of characteristic-sorted portfolios, extended by the very recent method of two-way portfolio sorts as an alternative to classical multivariate regressions. This mostly nonparametric approach, combined with portfolio aggregation, provides very robust results. Our major finding is that the financial characteristics value and momentum have a very high predictive power for monthly returns of metal portfolios. Metal-specific fundamental factors like stocks, secondary production, apparent consumption, country concentration, mine production, or reserves perform depending on the interpretation moderately well or rather poorly, regarding some economically interpretable transformations and when using multivariate two-way sorts. Hence, from the perspective of expected returns, metals are predominantly assets, while fundamental metal-specific factors still play a non-negligible role. Thus, to a much lesser extent, metals can still be regarded as resources. Overall, the combination of financial characteristics and metal-specific fundamental factors yields the best results. With these robust results, we hope to contribute to a better understanding of metal prices and their underlying factors.