1. 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

2. 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

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

4. Long-Term Gold Price

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

6. Long-Term Oil Price

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

8. The Creation of the Euro

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

10. Daily Data since 1999

11. 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.

12. 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?

13. Augmented Dickey-Fuller Tests of Stationarity The model is:

14. Price Level (LN(X)) Only LagsLags and Constant Lags, Constant, and Trend Gold No lags2.3611110.667188-2.836540 5 lags2.3637080.693961-2.843861 20 lags2.3737040.766124-2.862830 Oil No lags1.191509-0.626496-2.759707 5 lags1.313748-0.461972-2.541877 20 lags1.368074-0.235474-2.456710 Euro No lags0.631741-0.079099-3.034661 5 lags0.659061-0.049944-3.063701 20 lags0.521473-0.293593-2.657669

15. First Price Differences (LN(X t ) - LN(X t-1 )) Only LagsLags and Constant Lags, Constant, and Trend Gold No lags-46.65579-46.77877-46.81729 5 lags-18.68709-18.86720-18.93417 20 lags-9.389532-9.698579-9.833956 Oil No lags-45.22329-45.25046-45.24871 5 lags-19.52137-19.57521-19.58983 20 lags-10.21073-10.31103-10.35710 Euro No lags-46.05127-46.07716-46.10367 5 lags-17.92471-17.97228-18.02022 20 lags-9.111516-9.214248-9.259299

16. Engle and Granger Test of Cointegration of LN(Price) Dependent Variable (X) Independent Variable (Y) b0b0 t-stat GoldOil-0.009211-2.920998 OilGold-0.010399-3.122336 GoldEuro-0.003219-1.723030 EuroGold-0.003753-1.950192 OilEuro-0.006973-2.584827 EuroOil-0.006324-2.512779

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

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

19. 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

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