Are oil, gold and the euro inter-related? Time series and neural network analysis

This paper investigates inter-relationships among the price behavior of oil, gold and the euro using time series and neural network methodologies. Traditionally gold is a leading indicator of future inflation. Both the demand and supply of oil as a key global commodity are impacted by inflationary expectations and such expectations determine current spot prices. Inflation influences both short and long-term interest rates that in turn influence the value of the dollar measured in terms of the euro. Certain hypotheses are formulated in this paper and time series and neural network methodologies are employed to test these hypotheses. We find that the markets for oil, gold and the euro are efficient but have limited inter-relationships among themselves.     

Conditional Dependence in Precious Metal Prices

This study investigates the time-series properties of gold and silver spot prices. Both precious metal price series are found to exhibit time dependence and pronounced generalized autoregressive conditional heteroscedastic (GARCH) effects. Splitting the data into similar economic subperiods provides superior explanation of these effects because of the observed long-run nonconstancy of the unconditional variance. Further, the power exponential distribution, as opposed to the Student-t, is found to portray accurately the thick-tailed conditional variance that remains after the GARCH effects are removed. These findings imply that constant variance pricing models are inappropriate for securities that are based on precious metal prices.     

Dealership market: Market-making with inventory

This study considers the problem of a price-setting monopolistic market-maker in a dealership market where the stochastic demand and supply are depicted by price-dependent Poisson processes [following Garman (1976)]. The crux of the analysis is the dependence of the bid-ask prices on the market-maker's stock inventory position. We derive the optimal policy and its characteristics and compare it to Garman's. The results are shown to be consistent with some conjectures and observed phenomena, like the existence of a ‘preferred’ inventory position and the downward monotonicity of the bid-ask prices. For linear demand and supply functions we derive the behavior of the bid-ask spread and show that the transaction-to-transaction price behavior is intertemporally dependent. However, we prove that it is impossible to make a profit on this price dependence by trading against the market-maker. Thus, in this situation, serially dependent price-changes are consistent with the market efficiency hypothesis.     

Do Gold Market Returns Have Long Memory?

This study examines the long memory behavior in gold returns during the post-Bretton Woods period using a new rescaled range technique. Unlike the conventional rescaled range analysis, the new rescaled range analysis is robust to short-term dependence and conditional heteroscedasticity found in the gold data. Statistical results suggest that the long memory behavior in gold returns is rather unstable. When only few observations corresponding to major political events in the Middle East, together with the Hunts event, in late 1979 are omitted, little evidence of long memory can be found.     

Long-term dependence in common stock returns

The efficient market, martingale model of security price movements requires that the arrival of new information be promptly arbitraged away. A necessary and sufficient condition for the existence of an arbitraged price is that statistical dependence among prices must decrease very rapidly. If persistent statistical dependence is present, the arbitraged price changes do not follow a martingale and should have an infinite variance. Using a technique for detecting long-term dependence, called R/S analysis, 200 daily stock return series are studied; many series are characterized by long-term dependence. Thus, in the presence of long-term dependence, the martingale model does not hold. Also, the distribution of security returns is non-normal stable Paretian as opposed to Gaussian.     

Psychological barriers in gold prices?

This paper examines for the first time the existence of psychological barriers in a variety of daily and intra-day gold price series. This paper uses a number of statistical procedures and presents evidence of psychological barriers in gold prices. We document that prices in round numbers act as barriers with important effects on the conditional mean and variance of the gold price series around psychological barriers.     

Stochastic Convenience Yield Implied from Commodity Futures and Interest Rates

We characterize a three‐factor model of commodity spot prices, convenience yields, and interest rates, which nests many existing specifications. The model allows convenience yields to depend on spot prices and interest rates. It also allows for time‐varying risk premia. Both may induce mean reversion in spot prices, albeit with very different economic implications. Empirical results show strong evidence for spot‐price level dependence in convenience yields for crude oil and copper, which implies mean reversion in prices under the risk‐neutral measure. Silver, gold, and copper exhibit time variation in risk premia that implies mean reversion of prices under the physical measure.     

Futures and realized cash or settle prices for gold,silver, and copper

This article examines the relation between 15-, 30-, 45-, and 60-day gold, silver, and copper futures, and their realized cash or delivery settle prices, for deliveries on the first, middle, and last business day (FD, MD, and LD, respectively) of the delivery month. Samples of futures prices for gold, silver, and copper, and the realized cash or delivery settle prices, based on fixed maturities for a cross-section of contracts are used, because time-series over fixed maturities are unfeasible owing to the restrictive maturity periods in these contracts. This study contrasts with similar studies for forwards, which are not hampered by this problem (e.g., Baillie and Bollerslev in 1989), studies that use contemporaneous time-series of futures and cash prices to obtain optimal hedge ratios (e.g., Ghosh and Clayton in 1996), and studies that examine for parity between different futures prices (e.g., Franses and Kofman in 1991). Near-term gold, closest to delivery silver and all copper futures (the latter only with settle prices at delivery) are good predictors of the future cash price, except for silver and copper deliveries on the last day of delivery months. These results are consistent with previous studies on short-term cash (Ma in 1985) and futures (Ma and Soenen in 1988) parity between gold and silver, and with Gross's (1988) results for copper. The longer-term gold (45- and 60-day) and silver (30-, 45-, and 60-day) futures reject an unbiased expectations hypothesis. This result is consistent with Leistikow (1990) because cash prices respond less than futures prices in these instances.     

Investment in gold: A bibliometric review and agenda for future research

Significant surge in gold prices has attracted speculators, investors and intellectuals alike. Factors driving gold prices, the effectiveness of gold price predictions, the economic viability of gold mining, risk management using gold, and its comparisons against exchange rates and stock prices have been some of the consistent foci of researchers. Applying bibliometrics on 453 top articles published on gold between 1970 and 2021, we present a comprehensive overview of the academic discussions on one of the fast evolving research domains. Apart from identifying the publication and citation trends, we note seven intellectual clusters contributing to growth of the contemporary research identified as: dynamics of gold prices and its linkage with other asset prices, gold prices: forecasting and comparison, gold as an instrument for an inflation hedge, gold and currency market, economic policy and gold prices, role of gold in the global financial market, and expected value and volatility of gold.     

Hedges or safe havens—revisit the role of gold and USD against stock: a multivariate extended skew-t copula approach

Our paper concerns the question of whether there exist hedge assets during extreme market conditions, which has become increasingly important since the recent financial crisis. This paper develops a novel extended skew-t copula model to examine the effectiveness of gold and US dollar (USD) as hedge or safe haven asset against stock prices for seven developed markets over the 2000–2013 period. Our results indicate the existence of skewness and heavy/thin tails in the distributions of all three types of assets in most of the developed markets, lending support to the employment of flexible distributions to evaluate the tail dependences among assets. We find that USD is preferred to gold as a hedge asset during normal market conditions, while both assets can serve as safe haven assets for most countries when stock markets crash. Our simultaneous analysis of the three assets advises against a joint hedge strategy of gold and USD due to the high tail dependence between them during extreme market conditions. This result highlights the importance of simultaneous modelling of multiple assets in financial risk analysis.     

Derivatives traders’ reaction to mispricing in the underlying equity

This article examines trading behavior in the options market conditioned on mispricing in the underlying stock. We investigate the price equilibrium between the observed equity asset and the options-implied synthetic share as well as the relative divergence between the two prices. We find a consistently positive relation between the level of stock mispricing and violations of the upper-boundary condition using derivatives, along with an increase in price divergence. To control for the effect of shorting limitations on mispricing, we further examine prices during the short-sale ban in 2008. The results hold and in many instances are more significant during the ban period. Given the persistent disequilibria between the synthetic and observed stock prices, we argue the results are evidence of informed trading in the derivatives market.     

Gold and tax capitalization: A natural experiment

This research examines whether U.S. income taxes are capitalized into gold coin prices. For years, the American Eagle (Eagle) was the sole gold coin to be IRA eligible. The Taxpayer Relief Act of 1997 expanded eligibility to include all other gold coins beginning on January 1, 1998, except the South African Krugerrand (Rand). In this natural quasi-experiment, we examine whether gold coin prices reacted to the change in IRA-eligibility. Results are largely consistent with the capitalization of implicit taxes in gold coin prices. When legislation allowing IRA eligibility of both the Canadian Maple Leaf (Maple) and the Rand was introduced, the prices of both coins increased relative to the Eagle. When final legislation excluded the Rand from IRA eligibility, but not the Maple, the Rand's price declined while the Maple's did not. The findings contribute to the tax capitalization literature and the effects of interjurisdictional taxation in integrated global markets.     

Do currency exchange rates impact gold prices? New evidence from the ongoing COVID-19 period

We apply the nonlinear autoregressive distributed lag method to examine the relationships between seven leading currency exchange rates and gold prices using daily data from January 2017 to April 2021. The results reveal that in the short term, while negative United States dollar (USD) to United Kingdom pound, negative USD to Canadian dollar, negative USD to Japanese yen, negative USD to Danish krone, and positive USD to euro exchange rates increase gold prices, a lagged positive USD to euro and lagged positive USD to Danish krone exchange rates decrease gold prices. A test of the pre-pandemic normal period reveals that the uneven and unpredictable impacts of six exchange rates on gold prices are particularly due to COVID-19. We find efficiency in the gold market, in line with the market efficiency hypothesis and random walk theory. Our findings indicate that gold acts as a safe-haven asset for investors during COVID-19.     

The effects of uncertainty measures on the price of gold

This paper analyzes the determinants of the price of gold with a special focus on four uncertainty measures (namely, the volatility (VIX), skewness (SKEW), global economic policy uncertainty (EPU), and partisan conflict (PC) indexes). The nonlinear Autoregressive-distributed Lag (ARDL) model is used to investigate the asymmetric effect of uncertainty measures on gold prices. The results show that rising economic policy uncertainty contributes to increases in the price of gold. By contrast, gold prices are less likely to fall when economic policy conditions are improved.     

Arbitrage, Risk Premium, and Cointegration Tests of the Efficiency of Futures Markets

This article provides a new perspective on the efficiency of futures markets in a cointegration framework. Under the conventional risk premium hypothesis, if futures and spot prices are non-stationary, they must be cointegrated if futures markets are efficient. Alternatively, the cost-of-carry model implies that there should be a cointegration relationship among spot prices, futures prices and interest rates assuming all the series contain a unit root. Market efficiency further implies specific parameter restrictions under these two models. Using data on the futures markets for gold, silver, palladium and platinum, this article first establishes that interest rates, spot and futures prices are unit root non-stationary. The evidence on cointegration is somewhat mixed: the gold futures market is consistent with the cost-of-carry model, and the silver futures market satisfies the risk premium hypothesis, but the evidence for the other two markets is inconclusive.     

The Beauty Contest and Short‐Term Trading

Short‐termism need not breed informational price inefficiency even when generating beauty contests. We demonstrate this claim in a two‐period market with persistent liquidity trading and risk‐averse, privately informed, short‐term investors and find that prices reflect average expectations about fundamentals and liquidity trading. Informed investors engage in “retrospective” learning to reassess inferences (about fundamentals) made during the trading game's early stages. This behavior introduces strategic complementarities in the use of information and can yield two stable equilibria that can be ranked in terms of liquidity, volatility, and informational efficiency. We derive implications that explain market anomalies as well as empirical regularities.     

Gold and the Dollar (and the Euro, Pound, and Yen)

Usually, gold and the Dollar are negatively related; when the Dollar price of gold increases, the Dollar depreciates against other currencies. This is intuitively puzzling because it seems to suggest that gold prices are associated with appreciation in other currencies. Why should the Dollar be different? We show here that there is actually no puzzle. The price of gold can be associated with currency depreciation in every country. The Dollar price of gold can be related to Dollar depreciation and the Euro (Pound, Yen) price of gold can be related to Euro (Pound, Yen) depreciation. Indeed, this is usually the case empirically.     

Optimal portfolio choice of gold assets in the differential market and differential game structures

Portfolio choices of gold-related assets for market investors and dealers may not only depend on price differences and the inflation rate, but may also react to the market participants’ strategic behavior and risk attitude. This study develops a two-agent stochastic differential game model to solve the portfolio choice problem of the asset allocations of gold spot, futures, and cash for market participators who are exposed to inflation risks. The equilibrium prices of spot and futures driven by the volatility rate and co-variances that reflect various risk sources are also determined. Specifically, regarding the choice of hedging tools, market participators may prefer gold spot to futures for the purpose of hedging inflation risk. By capturing the stylistic facts of differential market and multiple agent structures, the article can develop a more reasonable and practical model to usefully explain the gold portfolio choices and pricing in the gold markets.     

Commodity prices and BRIC and G3 liquidity: A SFAVEC approach

This paper investigates the influence of liquidity in the major developed and major developing economies on commodity prices. Liquidity is taken to be M2. A novel finding is that unanticipated increases in the BRIC countries’ liquidity is associated with significant and persistent increases in commodity prices that are much larger than the effect of unanticipated increases in G3 liquidity, and the difference increases over time. Over 1999–2012 BRIC liquidity is strongly linked with global energy prices and global real activity whereas G3 liquidity is not. The impact of BRIC liquidity on mineral and metal prices is twice as large as that of G3 liquidity. Granger casualty goes from liquidity to commodity prices. BRIC and G3 liquidity and commodity prices are cointegrated. BRIC and G3 liquidity and global output and global prices are cointegrated. We construct a structural factor-augmented error correction (SFAVEC) model.     

A melting pot — Gold price forecasts under model and parameter uncertainty

Gold is special as it is influenced by a wide range of factors such as commodity prices, interest rates, inflation expectations, exchange rate changes and stock market volatility. Hence, forecasting the price of gold is a difficult task and the main problem a researcher faces is to select the relevant regressors at each point in time. This model uncertainty in combination with parameter uncertainty is explicitly accounted for by Dynamic Model Averaging (DMA) which allows both the forecasting model and the coefficients to change over time. Based on this framework, we systematically evaluate a large set of possible gold price determinants and find that DMA (1) improves forecasts compared to other frameworks, (2) yields strong time-variation of gold price predictors and (3) favors parsimonious models. The results also show that typical in-sample features of gold such as its hedge property are weaker in an out-of-sample context.