Effects of Oil Price Interest Rate and Dollar Price of Euro on Gold Price

Topics: Gold as an investment, Precious metal, Bretton Woods system Pages: 12 (3476 words) Published: September 19, 2011
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: ++ E-mail: Fatma GÜLER Dokuz Eylül Üniversitesi İşletme Fakültesi/Senior Phone: ++ E-mail: Merve A. ÖZKALAY Dokuz Eylül Üniversitesi İşletme Fakültesi/Senior Phone: ++ E-mail: Bolor LAAGANJAV Dokuz Eylül Üniversitesi İşletme Fakültesi/Senior Phone: ++ 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


In recent years gold has been controversial because of sharp increase in gold prices. Price of gold exceeded 1092$ per ounce in New York Stock Exchange in November 2009. 2008 Global Economic Crisis give rise to uncertainty in the global economy including developed and developing countries. Gold is not only used in jewellery but also used in industrial and medical applications. Moreover, gold is used for investment purposes by governments, households, institutional and private equity investors. If there is an economic uncertainty then gold become an insurance. In such cases, gold can protect us against the inflation and deflation. In addition, according to the World Gold Council (2006) Central Banks hold gold reserves because gold provides economic and physical safety, sustains world wide confidence and offers diversification benefits. Gold is a frequently investigated topic in literature. However each studies approaches our variables from very different point of view. Ghosh et al. (2002) divided demand for gold into two: one of them is “use demand” and the other one is “asset demand”. Use demand consists of production of jewelery, medals and coins. They matched asset demand with effective hedge. We have mentioned that gold had become an insurance policy, when there was an economic uncertainity. Capie et al. (2005) mention that even after money was invented, gold have remained to be hedge. They also explained that, if we have gold as money, this means we link currency to gold at a fixed price. In this case, price of gold can not determined by the government or central banks and automatic stabilizing mechanism occurs. Furthermore, Vaihekoski and Patari (2007), group the demand for gold into two categories. These are the demand for the physical gold and demand for investment purposes of institutional and private equity investors....

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Empirical Studies in Social Sciences
6th International Student Conference, Izmir University of Economics, Izmir Turkey
Vaihekoski, M., & Patari, E. (2007). Gold Investments and Short- and Long-Run Price Determinants of the Price of Gold. Lappeenranta University of Technology,School of Business Finance, 1-77.
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