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The Quantitative Effect Of Mood On Precious Metals

Published 09/11/2013, 01:28 PM
Updated 05/14/2017, 06:45 AM
Last week we looked at an academic paper that asked if gold was an inflation hedge. The findings contradicted what so many of us had previously believed showing that data needs to be regularly re-examined so it can help to influence our investment decisions.

Economic data is all very well but what about the mood you’re in? How does this affect the price of precious metals?

Price And Mood
In a 2011 paper Professor Brian Lucey and Michael Dowling looked at mood and precious metals. This may seem odd to those new to the world of investment, but several pieces of research have previously been carried out looking at the link between equity pricing and mood.

While much of the research on equity prices, as the authors point out, is wide ranging, it does have the over-arching finding that good mood is related to positive equity returns while a bad mood is hypothesised to have the opposite effect.

The authors draw the reader’s attention to previous studies that found both important and ‘transient, irrelevant emotions can influence our decision making.’

However, similar work has not been carried out in regard to gold, silver, platinum and palladium.

The authors looked at the following test variables:
  • SAD
  • Temperature
  • Wind speed
  • Precipitation
  • Visibility
While the study finds ‘some individual mood variables appear significant but this should be acknowledged hesitantly.’

However two key takeaways investors might be interested to learn are as follow:
  • The ‘SAD’ variable is significant for gold
  • ‘There is a significant negative relationship between platinum pricing and high temperature and high visibility days’
Overall the findings suggest that there is no overall relationship between the mood proxies precious metals pricing. The authors suggest that this ‘might be due to the relative sophistication of traders in these markets,’ but believe that further research needs to be carried out using a more targeted approach on market participants.

Bottom Line
What can precious metals investors take away from this? Well unlike equity prices, gold prices appear to be less affected by ‘moods’ which perhaps means, as the authors suggests, that precious metals investors are less easily swayed by changes in their immediate environment.

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