GOLD, OIL AND THE EURO: HYPOTHESES AND TIME SERIES ANALYSIS FOR FUTURES DATA A. G. Malliaris and Mary E. Malliaris Loyola University Chicago 84 TH ANNUAL CONFERENCE OF THE WESTERN ECONOMIC ASSOCIATION INTERNATIONAL Vancouver, June 29- July 3, 2009

Outline General Comments About Gold, Oil and the Euro These Markets Prior to the Creation of the Euro How are these Markets Related Since the Creation of the Euro

Gold As an Anchor of the Gold Standard As a Hedge Against Inflation As a Free Commodity Since mid-1971

Long-Term Gold Price

Oil Significant Commodity in Global Economy Its role today is somehow lesser than in early 70s but still important Extremely volatile

Long-Term Oil Price

The Euro Start with the European Common Market in 1957 From a Customs Union to One Market One Market with One Currency

The Creation of the Euro

Data Daily data from January 4, 2000 to December 31, 2007 for a total of 1,991 observations from Barchart.

Daily Data since 1999

Hypotheses Do these 3 Markets follow Random Walks? The twin U.S. deficits weaken the dollar and strengthen the euro and induce oil producers to demand compensation. Increases in oil prices impact gold prices.

Time Series Methods Are the euro, oil and gold co-integrated? Are there any short- and long-term relationships between the euro, oil and gold?

Augmented Dickey-Fuller Tests of Stationarity The model is:

Price Level (LN(X)) Only LagsLags and Constant Lags, Constant, and Trend Gold No lags lags lags Oil No lags lags lags Euro No lags lags lags

First Price Differences (LN(X t ) - LN(X t-1 )) Only LagsLags and Constant Lags, Constant, and Trend Gold No lags lags lags Oil No lags lags lags Euro No lags lags lags

Engle and Granger Test of Cointegration of LN(Price) Dependent Variable (X) Independent Variable (Y) b0b0 t-stat GoldOil OilGold GoldEuro EuroGold OilEuro EuroOil

Error-Correction Model (ECM) for Testing for Long-Term and Short-Term Relationship The model is:

Results of Time Series Analysis Random Walks Confirmed Cointegration Confirmed Oil Prices are Driven by Gold and the Euro

From Time Series to Neural Network Dependent VariableReg. Top 5 VariablesNN Top 5 Variables Euro LEuroM1 LGoldM1 LGoldM2 LEuroM3LOilM1 LEuroM4LOilM2 Oil LOilM1 LEuroM5LOilM2 LGoldM1 LEuroM3LGoldM2 LGoldM3LEuroM5 Gold LGoldM1 LOilM1 LOilM2 LEuroM2LGoldM2 LEuroM4

Conclusions From Old Independent Relationships To New Interrelated Relationships More work needed to study relationships during the financial crisis