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How Does Investor Sentiment Shape the Liquidity Response to Monetary Policy Announcements in Precious Metal Markets?

In addition to a myriad of industrial uses, precious metals continue to play an important role in the global financial system; they are increasingly popular as an investment and form part of a well-diversified portfolio in addition to acting as central bank reserves. Understanding how macroeconomic events shape liquidity in this market is important for a number of market participants, and also helps policy makers assess the efficacy of the policy transmission mechanism. Using high-frequency data, we consider liquidity provision in the period around monetary policy announcements and relate this to prevailing levels of investor sentiment. We are able to contrast changes in liquidity in the gold and silver markets, and across three instruments (futures, ETFs, and physical/bullion). We show that liquidity is removed from the market around 5-minutes prior to the announcement and then reverts to normal within 10-minutes (gold market) and 20-minutes (silver market). The magnitude of the liquidity response is determined by both the scale of surprise in the FOMC announcement, and the prevailing level of investor sentiment. Both sentiment and monetary policy surprises have a greater impact on liquidity during periods of low sentiment, consistent with the idea that demand for assets with ‘safe-haven’ qualities is greatest during such periods.