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Empirical Studies in Social Sciences

6th International Student Conference, Izmir University of Economics, Izmir Turkey

Effects of Oil Price, Interest Rate and Dollar Price of Euro on Gold Price
Hakan GÜNEŞ Dokuz Eylül Üniversitesi İşletme Fakültesi/Senior 6114 sokak No:19 D:6 Karşıyaka İZMİR Phone: ++ <05556458296> E-mail: <> Fatma GÜLER Dokuz Eylül Üniversitesi İşletme Fakültesi/Senior Phone: ++ <05362204838> E-mail: <> Merve A. ÖZKALAY Dokuz Eylül Üniversitesi İşletme Fakültesi/Senior Phone: ++ <05053368519> E-mail: <> Bolor LAAGANJAV Dokuz Eylül Üniversitesi İşletme Fakültesi/Senior Phone: ++ <05555566143> E-mail: <>
Abstract We have witnessed sharp increase in gold prices in recent years. Since gold has many functions as directly used in jewellery, hedging against inflation and providing economic and physical safety etc, it is very important to know what the determinants of gold prices are. This paper, using the world gold price data for over 10-year period from 2000 to 2009, aims to explain the rise in gold price by considering the effect due to changes in oil price, eurodollar parity and interest rate. Thus we can understand the components of the gold price and advise policy. In our analysis, we applied Ordinary Least Squares method to estimate our regression model, cointegration test to find out if there is long run relationship between gold price and the other variable and made unit root test, specifically Augmented Dickey Fuller test, to investigate the stationarity. After that Granger- Causality test between gold price and each independent variable; except oil price, is examined. We omitted oil price from our model. This is because, just interest rate is not I(1) process, but it is I(0) . The result without oil price shows that there is no long-run relation between gold price, interest rate and eurodollar parity and Granger- Causality does not occur for both gold price-interest rate and interest rate-gold price, and for gold price-eurodollar parity and eurodollar parity-gold price.

Key words: Gold price, oil price, euro dollar parity, interest rate, stationarity, ADF, cointegration JEL Classification: C22, D40, F31


(2008) investigated whether gold or oil is a better indicator of the inflation and tried to find out which one provides a better hedge against the inflation in Turkey. most of the researches emphasized on hedge characteristics of gold. (2005) explained why gold has been a hedge. Price of gold exceeded 1092$ per ounce in New York Stock Exchange in November 2009. 2 . there are short-run deviations from the long-run relationship between the price of gold caused by short-run changes in the US inflation rate. this means we link currency to gold at a fixed price. Use demand consists of production of jewelery. Aggarwal (1992) mentioned about gold’s failure of being short run hedge against inflation. For instance. Moreover. if we have gold as money. not in the short and medium terms. Gold is a frequently investigated topic in literature. credit risk. (2002) divided demand for gold into two: one of them is “use demand” and the other one is “asset demand”. institutional and private equity investors. The reason behind this situation is gold is homogenous asset and it is easily traded in continious open market. An asset is an inflation hedge if it yields a return exceeding the inflation rate (Hsieh et al. group the demand for gold into two categories. Kucukozmen et al. households. However.1. These are the demand for the physical gold and demand for investment purposes of institutional and private equity investors. compared to the US CPI. Vaihekoski and Patari (2007). whereas inflation hedging abilities of both gold and oil depend on the existence of a stable long term relation with the inflation rate which is not existed. Capie et al. Gold is not only used in jewellery but also used in industrial and medical applications. In addition. They matched asset demand with effective hedge. In this case. Basically. lead to a conclusion that gold is a long-run hedge against inflation. 2002). Gosh et al. Likewise. They also explained that. price of gold can not determined by the government or central banks and automatic stabilizing mechanism occurs. According to him gold is an effective hedge against inflation and political uncertainity in the long run. gold is used for investment purposes by governments. In such cases. Levin and Wright (2006) emphasized in their article that. gold have remained to be hedge. gold can protect us against the inflation and deflation. (2004) have found the price elasticity of gold. However each studies approaches our variables from very different point of view.Introduction In recent years gold has been controversial because of sharp increase in gold prices. as well as there is a slow reversion towards the long-term relationship following a shock that causes a deviation from this long-term relationship. (2005) mention that even after money was invented. Kucukozmen et al. medals and coins. Ghosh et al. We have mentioned that gold had become an insurance policy. sustains world wide confidence and offers diversification benefits. (2008) reached a conclusion that gold is a better inflation indicator than oil. when there was an economic uncertainity. in literature. gold is a long-term hedge against inflation. inflation volatility. according to the World Gold Council (2006) Central Banks hold gold reserves because gold provides economic and physical safety. the US dollar tradeweighted exchange rate and the gold lease rate. 2008 Global Economic Crisis give rise to uncertainty in the global economy including developed and developing countries. Capie et al. If there is an economic uncertainty then gold become an insurance. Furthermore.

By this way they can take the most appropriate position. However in last 2 quarters of 2008. Section II includes our data and the method of model. There are 120 monthly observations. on December. First of all. there is an increasing trend in gold price and reached its the highest point. oil prices decreased sharply because of Global Economic Crisis and reached to a minimum level. Asian growing demand for oil. oil price. As well as the financial markets can be understood thoroughly by these actors. Also this study uses more frequent and the most recent data. This study found out that gold is an internal and external hedge which means gold is hedge against possible TL depreciation and rising inflation. we will summarize our model’s data and present the methodology of our model. that had not been reached since 2004. Vaihekoski and Patari (2007) used US/world exchange in their model which is statistically significant. They found out that there is a positive relationship between AUS/USD exchange rate and gold price. They analyzed whether gold is an internal hedge or an external hedge against TL. a research about gold was made by Ozturk and Acikalin (2008) comprising Turkey. 2009. (2000) studied the long term and short term relationships between the exchange rate of AUS/USD and the gold price. Izmir University of Economics. we take into account the effect of interest rate. Also authors concluded that gold can help for monetary policy decisions because gold price is a good indicator of expected inflation. $1134. $31. Izmir Turkey Several researches are made about effects of exchange rates on gold prices. One of our independent variable. 3 . As can be seen from Figure 1. Moreover they found out that the dollar depreciation would lower the price of gold to investors outside the USA and raise the demand for gold and raise US dollar price of gold. Furthermore.Empirical Studies in Social Sciences 6th International Student Conference. Sub-head under the Section II presents the estimated results. Oil prices increased rapidly during this period and the reasons behind this can be explained by the Iraq War. The remaining sections of the study is as follows. The data set is given in the Appendix of this paper.72. We obtained our dependent variable. This paper’s contribution differs from the contributions of previous gold studies. Model In this section. gold price. dollar depreciation would lower the price of gold for them and make it more attractive. from “The London Bullion Market Association”. The data are monthly and cover the period from January 2000 to December 2009. For last 6 months. is taken from “Official Energy Statistics from the US Government”. The aim of this paper is to analyse the effects of oil prices. euro dollar parity and interest rate on gold prices. obtained from various sources. finally Section III is the conclusion part with short summary of our study. Han et al. 2. During last 6 months gold prices tend to increase. The results of this research can contribute to policymakers and analysts to understand determinants of gold price better. For a non US investor.

2000-2009 4 . We expect a positive relationship between oil price and gold price. We expect a negative relationship between interest rate and gold price. respectively. We expect a positive relationship between eurodollar parity and gold price. We took 3 month US Treasury Bill’s interest rate from secondary market into our model. As interest rate decreases. opportunity cost of depositing money to the bank will decrease and people can start to invest in gold more. Euro dollar parity. Figure 3 and 4 illustrates the data of interest rate and eurodollar parity. 2000-2009 Figure3. Interest Rate. Euro dollar parity specifies how much one euro is worth in terms of dollar. It is obtained from “Board of Governor of the Federal Reserve System”. This is because as dollar depreciates against euro. Figure1. Oil Price. euro dollar parity. Euro started to be in circulation from 2000 in EMU and that’s why we collected our time series data from this date. The last independent variable is interest rate. 2000-2009 Figure4. for nonUS citizens purchasing gold will be cheaper and demand and price of gold increases.oil price started to increase again (See Figure 2). Another independent variable. Gold Price. 2000-2009 Figure2. is provided from “Board of Governor of the Federal Reserve System”.

Causality test for each independent variables with dependent variable in pairs.412) (0. their regression is calculated by using OLS estimation procedure.823* (110. Gold t = β1t + β2t Oil t + β3t Eurodollar t + β4t Interest t + ε t Where gold is our dependent variable and it shows gold prices.Empirical Studies in Social Sciences 6th International Student Conference. eurodollar parity and interest rate respectively.683* (108. The unit root test results for all series are presented in the Table 2 below. To understand whether there is cointegration or not. interest rate series to investigate the stationary properties of the relevant series. we applied Granger. Table 1. oil price and eurodollar parity. In addition. firstly.1.07 and as a rule of thumb. The 77 percent of the variation in gold price can be explained by the model in %95 confidence interval. Emprical Results To observe the effects of oil prices. if R2 is greater than DurbinWatson d statistics we can suspect from spurious regression. Results indicate that all variables are statistically significant at %5 interval. Results are presented in Table 1. we examined relationship between the nonstationary variables by using cointegration test which investigates the long term relationship between variables.780 n=120 Constant Oil Price -421.195* 2.Dickey Fuller tests are applied at level to our time series variables. oil price. interest rates and euro dollar parity on gold prices. interest rate on the gold prices we used Ordinary Least Squares method. Izmir University of applied to gold price. Izmir Turkey Our regression equation is.stat 0. Augmented. Determinants of gold price Coefficient R 2 0. this result may be caused by nonstationary time series used in our model. Therefore. β t is constant term and 1 we have 3 independent variables.701) * Denotes significance at the %5 interval.174) Interest Rate -16. there are significant relationship between variables. 5 . Durbin-Watson d statistic is 0. Even. -Augmented Dickey Fuller test.895) DW. In order to evaluate the effects of oil prices. eurodollar. we obtained residual series from OLS estimation and applied unit root test on it.076 Euro/$ 729.837* (6. 2. Unit root test. After that.

euro dollar parity became stationary in I(1) process. Unit Root Results.886 -3. After that.440 5% critical values -2.886 -3.374 -1.448 Decision R H R H R H R H R H R H 0 0 0 0 0 0 Gold prices. already have a general appearance of nonstationary but.838 -7.698 -6. Unit Root Test Results Series Gold Price Trend Present No Yes No Yes No Yes No Yes Tau-statistics 1.Table 2.088 -7. in the interest graph there is an uncertainity of nonstationary.886 -3.448 -2.886 -3.114 -6. 6 .448 -2.449 -2.011 -1. The plots of the first differences for gold price.313 -2.286 -10. interest rate and eurodollar parity are presented below. interest rate.025 -3. we applied the unit root test for the first differences of the nonstationary variables. Table 3. Test results indicate that all of the series are nonstationary.458 -2.438 -1.653 -1. but the oil price with trend is stationary.886 -3. Plots of variables strengthen our test results.886 -3. Results are given in the below in Table 3.796 5% critical values -2.892 -3.448 -2. The plots of variables as indicated above.668 -4.448 Decision D RH D RH 0 0 Oil Price Euro/$ Interest Rate D RH 0 R 0 H D RH D RH D RH D RH 0 0 0 0 An intercept was included in the model and the test was performed in the absence of a trend term and with a trend term present.First Differences Series Gold Price Interest Rate Euro/$ Trend Present No Yes No Yes No Yes Tau-statistics -10.

Stationary process of Gold Price Figure 6.606) * Denotes significance at %5 interval. Izmir University of Economics. Determinants of gold price Coefficient R 2 0. according to test results.243) Euro/$ 1016. See table 4. Stationary process of Eurodollar Parity To utilize cointegration method. Stationary process of Interest Rate Figure 8.Empirical Studies in Social Sciences 6th International Student Conference.146 (6. we dropped it from our regression model.474* (75. Since oil price is I(0) and the other variables are I(1).282* (56. all series have to be simultaneously integrated of the same order. Figure 5. Izmir Turkey Consequently. 7 .762 n=120 Constant -662. Table 4. Plots have a general appearance of stationary as you can see at figures below.028) DW-stat 0. and the other variables are I(1). oil price is I(0) . we re-run the regression by omitting the oil price. Therefore.070 Interest Rate -8.

direction of influence of these time series. As a result of this test. in order to determine the casual relationships between €/$ exchange rate and gold price and between oil price and gold price. series used in test are stationary. Table 5.041 The null hypothesis that gold price does not Granger cause interest rate. between independent variables and dependent variable.052 0. Furthermore. Pairwise Granger Causality Test Results Null Hypothesis Gold price does not Granger cause Interest Rate. After that. In order to investigate causality. 3.9. F statistics 0. interest.3390 and critical value at %1 significance level is -3. we should find optimum lag numbers to apply Granger causality test for each pairs. That’s why we drop the interest rate from our model. gold and interest rate. The results indicate that gold does not Granger cause interest rate and interest rate does not Granger 8 . All variables must be the same order of integration. and also interest rate does not Granger cause gold price can not be rejected. Augmented Dickey Fuller test statistics is -0. we estimated Vector Autoregression for each pairs in different lag numbers one by one. eurodollar parity does not Granger cause gold price and gold price does not Granger cause eurodollar parity in the short-run. euro dollar parity. Moreover. There are not causality between gold-eurodollar parity and gold-interest rate. Then we suspect from spurious regression and stationary properties of the gold price. we reached that residual series has a unit root.010 0. For gold and interest rate and for gold and eurodollar parity optimum lag number is 1. Granger causality test assumes that. Euro dollar does not Granger cause gold price. Pairwise Granger causality test is used. we conclude that there is no cointegration. we executed Pairwise Granger causality test procedure. we investigate causality. We applied unit root test to this model’s residual series to examine cointegration relationships. interest rate on gold price are analysed. If residuals has unit root there is no cointegration which means there is no long-term relationship between the independent variables and dependent variable. we checked the Akaike Information Criteria and we picked the lag number in which VAR has minimum Akaike Information Criteria. Interest Rate does not Granger cause gold price. Gold does not Granger cause euro dollar. Interest rate has different order. we run the regression by using OLS estimation process.484 0. Lastly. Since critical value is less than test statistics. gold and eurodollar parity. To find optimum lag numbers. That’s why we used first differences of time series.We obtained residual series from this model and applied unit root test to this residual series. Conclusion In this paper. oil prices and eurodollar parity series. In addition. Our data is monthly time series so we repeat it until the tenth lag. this is a precondition for cointegration. no long-term relationship. Hence. The results of Granger causality test are presented in Table 5. First. we do not reject null hypothesis. effects of oil price.

Izmir Turkey cause gold. Izmir University of Economics. 9 .Empirical Studies in Social Sciences 6th International Student Conference. gold and independent variables. We expected to explain variations in gold prices by variations in our regression model. This research can be an example for the further papers. we expect a relationship between our independent variables and dependent variable. similarly. As a result there are no short term relationships between these variables either. gold does not Granger cause the eurodollar and eurodollar also does not Granger cause gold price. interest rate and eurodollar parity. Consequently. During our research. Advanced econometric methods and longer time series data can lead different results from ours. We find out that there is no cointegration between our dependent variable. However results do not support our expectations. we face with a spurious regression.

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