Metals price volatility, 1972-1995

Abstract We use a complete record of daily price quotations from the London Metal Exchange (the LME) to construct a set of monthly volatility measures over the 24-year period 1972–1995 for the six LME metals-aluminium, copper, nickel, lead, tin and zinc (data are from 1983–1995 for aluminium and nickel). Despite a widely held opinion to the contrary, volatility has shown no tendency to increase over this period. In particular, except in the case of tin, volatility levels were beneath their historic average levels over 1993–1995, a period of increased speculative interest in the metals markets. Nevertheless, volatility is itself very volatile. We develop a model which relates metals volatility to the metals balance, as manifest in the stock-consumption ratio. This model appears to account for much of the medium-term movement in volatility, in particular in the aluminium, nickel and zinc markets. The model attributes the modest rise in volatilities over 1993–1995 relative to 1990–1992 to tighter metals balances.