Relationship between Prices of Gold and Crude Oil – An Empirical Study

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Abstract

The dynamic and complex relationship among different economic variables has attractedthe researchers, policy makers and business people alike. This paper aims at analyzing the relationship between futures prices of gold and crude oil. The main objective is to find out the character, the determinants as well as the co-movements between the price levels of the said variables. This paper considers the daily futures prices of gold and crude oil traded between the period 1/4/2008 to 2/10/18. The relationship is analyzed with the help of correlation and regression statistics and findings thereby have been concluded.

Keywords: Gold, Crude oil, Futures price, Empirical relationship

Introduction

A trend of inter-relationship is very much evident in the prices of Gold and Crude oil. Gold is the oldest precious metal known to mankind, and it has been valued as a global currency, a commodity, an investment and an object of beauty. Crude oil is called as the "Mother of all commodities" because of its importance in manufacturing of a wide variety of materials.

The inter-connection of the two commodities became visible from the year 1933, where the crude oil producers of Middle east demanded gold in return of crude oil. Now Gold and crude oil are predominantly quoted in US dollars.

A theoretical and quantitative analysis has been tried to be made to have an overview of relationship between futures prices of gold and crude oil. Correlation and regression analysis have been made to find out the empirical relationship between these two commodity prices.

Literatures Reviewed

Melvin and Sultan (1990) contended that both changes in oil price and political unrests are significant determinants of gold rate. Narayan et al. (2010) was interested in the long-run relationship between gold and oil spot and futures prices of different maturities through the inflation channel and observed bidirectional causality. In the presence of common factors effect, Tang and Xiong (2012) stated that as a result of the financialisation process, futures prices of non-energy commodities became increasingly correlated with oil after 2004. Zhang and Wei (2010) analyzed co-integration and causality between gold and oil prices and found that there are consistent trends between oil price and gold price with a significant positive correlation during the sampling period 20002008. They observed in advance that...