Hedging geopolitical risk with industrial metals

Tom Henrik Fetscher (Student)

Student thesis: Master's Thesis

Abstract

The main purpose of the study “Hedging geopolitical risk with industrial metals” is to analyze whether industrial metals, particularly copper, aluminium, nickel and zinc, offer safe haven attributes or serve as reliable hedges against geopolitical risk. The research performs both daily and monthly regression analysis, applying the global common volatility (COVOL) index as a robust proxy for financial market risk. The results indicate that industrial metals are not appropriate hedging instruments during times of greater global uncertainty, as the results indicate a statistically significant negative relation with higher geopolitical risk. Yet, the research highlights the pro-cyclical characteristics of industrial metals by finding positive correlations with macroeconomic factors like inflation and global manufacturing. These metals continue to be vital to the world economy, especially considering industrial electrification and the shift to green energy. By concentrating on an asset class that has received less attention within the scope of geopolitical instability, the study adds to existing literature and points out the long-term value of industrial metals as assets with economic relevance and benefits for portfolio diversification, rather than crisis hedges.