The fate of gold : is it worth an investment?

Abstract

The rationale behind this study is to examine the relationship between the prices of gold, U.S Equities (SandP 500), the U.S currency value against the British Pound and the Euro, Crude Oil Price (WTI), U.S Federal Fund Rate, U.S Inflation (CPI) as well as the number of speeches made by the Board of Governors of the Federal Reserve System. This is accomplished by studying the causality, correlation, co-integration, impulse response function and variance decomposition functions. I develop two models with gold prices as the dependent variable and different explanatory variables and time frames in each of the models: The first model employs all variables except the EUR-USD exchange rate and the number of speeches, with a sample period from January 1971 to December 2011. On the other hand, the data range for the second model uses monthly returns from January 1997 to December 2011 with all variables being included. I found two co-integration equations in one of the models and VECM reveals the long and short-run relationships between the price of gold and other variables. Evidence of short run granger causality is detected where it is unidirectional. Moreover, the price of gold is explained mostly by its own innovations without being impacted by other variables.