Skip to main content

Advertisement

SpringerLink
Log in

Gold and oil prices: stable or unstable long-run relationship

  • Published:
Journal of Economics and Finance Aims and scope Submit manuscript

Abstract

This paper investigates the presence of a long-run relationship between the daily prices of oil and gold over the period 1986-2015. The presence of such a long-run relationship implies that the two markets are jointly inefficient; and that one price can be used as a predictor for the other price. We also test the presence of one or multiple structural breaks in the long-run relation. The presence of structural breaks suggests that the magnitude and the sign of the relationship between oil and gold prices may be different across different regimes. Our methodology is based on endogenous structural break tests and tests of cointegration with one or multiple breaks. Our results show that indeed this relation has changed over time and is subject to two or five regime changes. However, we do not find evidence for cointegration with or without breaks. The absence of a long-run equilibrium between oil and gold prices suggest that oil prices are biased predictor of gold prices. Hence, past information of oil prices is not relevant in forecasting gold prices.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Fig. 1

Similar content being viewed by others

Notes

  1. Most of the structural changes test developed in time series econometrics focus on abrupt structural breaks. Recently, smooth structural changes have gained increasing attention in time series and panel econometrics (see for instance Lee et al. (2016) and references inside).

  2. It is possible that using the price of oil as the sole predictor of gold’s price may result in the omission of other potential regressors explaining the price of gold. It is also possible that the location and the number of structural breaks change if the omitted variables are taken into consideration. However, our aim is not to investigate the determinants of gold’s price but the presence of a long-run equilibrium relationship between these two commodities. We do not consider other possible cointegrating vectors because our main objective is to investigate the long-run oil-gold prices relationship precisely.

  3. A similar strategy has been applied by Baharumshah et al. (2013) but in a panel data framework. They test the stationarity of the real interest rate parity, in the presence of multiple breaks, for thirteen Central and Eastern European countries over the period 1996-2011.

  4. One ounce of fine gold = 31.1034768g.

  5. Bundesbank constructs the series based on data from Samuel Montagu and Co. Ltd., FT and Reuters.

  6. We also tested the stationarity of oil and gold prices around one and two breaks in the constant and the trend using respectively Lee and Strazicich (2001) and Narayan and Popp (2010) tests. These tests consider the break(s) under both the null hypothesis of unit root and the alternative of stationarity. The Lee and Strazicich (2001) test statistics for oil and gold prices are respectively -3.463 and -2.596 and the break dates are respectively March 19 2007 and June 10 2006. The critical values at 1%, 5% and 10% significance levels are respectively -5.15, -4.45 and -4.18, hence the test does not reject the null hypothesis of unit root with a break. The Narayan and Popp (2010) test statistics for oil and gold prices are respectively -0.838 and -1.535 and the test does not reject the null hypothesis of unit root with two breaks at 1%, 5% and 10% significance levels.

  7. We also tried a 20% trimming value and the results of the test did not change

References

  • Akram QF (2009) Commodity prices, interest rates and the dollar. Energy Econ 31(6):838–851

    Article  Google Scholar 

  • Andrews DW (1991) Heteroskedasticity and autocorrelation consistent covariance matrix estimation. Econometrica 59(3):817–858

    Article  Google Scholar 

  • Arai Y, Kurozumi E (2007) Testing for the Null Hypothesis of Cointegration with a Structural Break. Econ Rev 26(6):705–739

    Article  Google Scholar 

  • Baharumshah AZ, Soon SV, Boršič D (2013) Real interest parity in central and eastern european countries: evidence on integration into eu and the us markets. J Int Financ Mark Inst Money 25:163–180. https://doi.org/10.1016/j.intfin.2013.02.001

    Article  Google Scholar 

  • Bai J, Lumsdaine RL, Stock JH (1998) Testing for and dating common breaks in multivariate time series. Rev Econ Stud 65(3):395–432

    Article  Google Scholar 

  • Bassil C, Hamadi H, Saadeh C (2014) Correlation and causation between crude oil and gold prices. International Research Journal of Finance and Economics (120)

  • Beahm D (2008) Five factors driving gold in 2008. www.blanchardgold.com

  • Beckmann J, Czudaj R (2013) Oil and gold price dynamics in a multivariate cointegration framework. Int Econ Econ Policy 10(3):453–468

    Article  Google Scholar 

  • Carrion-i-Silvestre JL, Sansó A (2006) Testing the null of cointegration with structural breaks. Oxf Bull Econ Stat 68(5):623–646

    Article  Google Scholar 

  • Chappell D, Dowd K (1997) A simple model of the gold standard. J Money, Credit, Bank 29(1):94–105

    Article  Google Scholar 

  • Dickey DA, Fuller WA (1979) Distribution of the estimators for autoregressive time series with a unit root. J Am Stat Assoc 74(366):427–431

    Article  Google Scholar 

  • Eliott G, Rothenberg TJ, Stock JH (1996) Efficient Tests for an Autoregressive Unit Root. Econometrica 64(4):813–836

    Article  Google Scholar 

  • Ewing BT, Malik F (2013) Volatility transmission between gold and oil futures under structural breaks. Int Rev Econ Financ 25:113–121

    Article  Google Scholar 

  • Ghosh D, Levin E, Macmillan P, Wright R (2004) Gold as an Inflation Hedge Stud Econ Financ 22(1):1–25

    Article  Google Scholar 

  • Gold Council (2016) Central banks. www.gold.org/supply-and-demand/demand/central-banks

  • Greenspan A (1994) Statement to Congress, February 22, 1994 (semi-annual monetary policy report). Federal Reserve Bulletin

  • Gregory AW, Hansen BE (1996) Residual-Based Tests for Cointegration in Models With Regime Shifts. J Econ 70(1):99–126

    Article  Google Scholar 

  • Gregory AW, Nason JM, Watt DG (1996) Testing for structural breaks in cointegrated relationships. J Econ 71(1-2):321–341

    Article  Google Scholar 

  • Hammoudeh S, Sari R, Ewing BT (2008) Relationships among strategic commodities and with financial variables: a new look. Contemp Econ Policy 27 (2):251–264

    Article  Google Scholar 

  • Harmston S (1998) Gold as a store of value. Tech. Rep. 22, World Gold Council

  • Kejriwal M (2008) Cointegration with structural breaks: an application to the feldstein-horioka puzzle. Studies in Nonlinear Dynamics and Econometrics 12(1):1–39

    Google Scholar 

  • Kejriwal M, Perron P (2010) Testing for multiple structural changes in cointegrated regression models. J Bus Econ Stat 28(4):503–522

    Article  Google Scholar 

  • Kolluri B (1981) Gold as a hedge against inflation: an empirical investigation. Q Rev Econ Bus 21(4):13–24

    Google Scholar 

  • Laurent RD (1994) Is there a role for gold in monetary policy Econ Perspect 18(2):2–14

    Google Scholar 

  • Le TH, Chang Y (2011) Oil and gold: correlation or causation? working papers 22, development and policies research center. DEPOCEN, Vietnam

    Google Scholar 

  • Lee C, Wu JL, Yang L (2016) A simple panel unit-root test with smooth breaks in the presence of a multifactor error structure. Oxf Bull Econ Stat 78(3):365–393. https://doi.org/10.1111/obes.12109

    Article  Google Scholar 

  • Lee J, Strazicich M (2001) Break point estimation and spurious rejections with endogenous unit root tests. Oxf Bull Econ Stat 63:535–558

    Article  Google Scholar 

  • Levin E, Wright R (2006) Short-run and long-run determinants of the price of gold. Tech. Rep. 32, World Gold Council

  • Liu J, Wu S, Zidek J (1997) On Segmented Multivariate Regressions. Statistica Sinica 7(2):497–525

    Google Scholar 

  • Ludwig A (2013) Testing the null of cointegration with a structural break: Optimal kernel and bandwidth selection. Econ Bull 33(4):2828–2839

    Google Scholar 

  • Mahdavi S, Zhou S (1997) Gold and commodity prices as leading indicators of inflation: Tests of long-run relationship and predictive performance. J Econ Bus 49(5):475–489

    Article  Google Scholar 

  • Moore G (1990) Gold prices and a leading index of inflation. Challenge 33(4):52–56

    Article  Google Scholar 

  • Narayan P, Narayan S, Zheng X (2010) Gold and oil futures markets: are markets efficient Appl Energy 87(10):3299–3303

    Article  Google Scholar 

  • Narayan PK, Popp S (2010) A new unit root test with two structural breaks in level and slope at unknown time. J Appl Stat 37(9):1425–1438

    Article  Google Scholar 

  • Ng S, Perron P (2001) Lag length selection and the construction of unit root tests with good size and power. Econometrica 69(6):1519–1554

    Article  Google Scholar 

  • O’Connor FA, Lucey BM, Batten JA, Baur DG (2015) The financial economics of gold - a survey. Int Rev Financ Anal 41:186–205

    Article  Google Scholar 

  • Phillips PC, Perron P (1988) Testing for a Unit Root in Time Series Regression. Biometrika 75(2):335–346

    Article  Google Scholar 

  • Pukthuanthong K, Roll R (2011) Gold and the dollar (and the euro, pound, and yen). J Bank Financ 35(8):2070–2083

    Article  Google Scholar 

  • Quintos CE (1998) Stability tests in error correction models. J Econ 82 (2):289–315

    Article  Google Scholar 

  • Sari R, Hammoudeh S, Soytas U (2010) Dynamics of oil price, precious metal prices, and exchange rate. Energy Econ 32(2):351–362

    Article  Google Scholar 

  • Seo B (1998) Tests for structural change in cointegrated systems regressions. Econ Theory 14(2):222–259

    Article  Google Scholar 

  • Shin Y (1994) A residual-based test of the null of cointegration against the alternative of no cointegration. Economet Theor 10(1):91–115

    Article  Google Scholar 

  • Simáková J (2011) Analysis of the relationship between oil and gold prices. Journal of Finance 51(1):651–662

    Google Scholar 

  • Soytas U, Sari R, Hammoudeh S, Hacihasanoglu E (2009) World oil prices, precious metal prices and macroeconomy in turkey. Energy Policy 37(12):5557–5566

    Article  Google Scholar 

  • Wang KM, Lee YM, Thi TBN (2011) Time and place where gold acts as an inflation hedge: An application of long-run and short-run threshold model. Econ Model 28(3):806–819

    Article  Google Scholar 

  • Worthington AC, Pahlavani M (2007) Gold investment as an inflationary hedge: cointegration evidence with allowance for endogenous structural breaks. Appl Financ Econ Lett 3(4):259–262

    Article  Google Scholar 

  • Yao YC (1988) Estimating the number of change points via schwartz criterion. Stat Probability Lett 6(3):181–189

    Article  Google Scholar 

  • Zhang YJ, Wei YM (2010) The Crude Oil Market and the Gold Market: Evidence for Cointegration, Causality and Price Discovery. Resour Policy 35(3):168–177

    Article  Google Scholar 

Download references

Acknowledgment

We thank two anonymous reviewers for their insightful comments and suggestions.

Author information

Authors and Affiliations

  1. Faculty of Business and Economics, Notre Dame University - Louaize, P.O. Box 72 Zouk Mikael-Louaize, Zouk Mosbeh, Lebanon

    Charbel Bassil & Hassan Hamadi

  2. Faculty of Business and Management, University of Balamand, Balamand Al Kurah, Zouk Mosbeh, Lebanon

    Patrick Mardini

Authors
  1. Charbel Bassil
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Hassan Hamadi
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Patrick Mardini
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Charbel Bassil.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Bassil, C., Hamadi, H. & Mardini, P. Gold and oil prices: stable or unstable long-run relationship. J Econ Finan 43, 57–72 (2019). https://doi.org/10.1007/s12197-018-9429-y

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s12197-018-9429-y

Keywords

JEL Classification

Search

Navigation