Research proposal

AREA: FinanceSubject:Commodity Market

TOPICGold as a safe heaven.Analyzing the fundamentals of the gold and empirical study of the factors causing movement in the gold price.

NAME: Muhammad Arsalan HassanMBA-RID# 8448submitted to :Usama Bin Iqbal (MS/M.PHIL,Ph.D)

Abstract:

This research project analyzes the relationship of Gold with the crude oil and Dollar index. The data used to cover the period from year 1995 to 2014. The methodology in this study includes Correlational test. The findings show that there is a Strong Positive positive relationship between the Gold and Crude oil and also found that it seems to be a moderate negative correlation of Gold with Dollar index.The findings imply that the Oil price can be used to predict the Gold price.As far as Dollar index is concern, its moderate nagative correlation with Gold means that investor can somewhat use its prediction of gold price on behalf of the Dollar index.

1. INTRODUCTION

Gold was one of the first metals people excavated. Gold as an asset has a hybrid nature: it is a merchandise utilized as a part of numerous commercial ventures additionally it has kept up all through history a special capacity as a method for trade and a store of worth, which profits. After World War II, the Bretton Woods framework pegged the United States dollar to gold at a rate of Us$35 every troy ounce. The framework existed until the 1971, when the US singularly suspended the immediate convertibility of the United States dollar to gold and made the move to a fiat cash framework. The last money to be separated from gold was the Swiss Franc in 2000.

The first argument says that when ever oil price increases it pressurize the economy so badly, lower the growth rate.As a result of that the investor rush toward the safe heaven investment like real estate,gold and other alternaate investments. Thus increasing oil price becomes the reason for the gold to increase in price. This scenario has become part of our history in 1970 when oil cartel reduced the production of crude oil and gold price started to accelerate and continued till 1979.

A relationship between gold and a currency can only be relative to a foreign exchange rate. Therefore, the US Dollar Index is used (USDX), which is a measure of the US dollars value relative to a basket of six currencies. These are the euro, British pound, Canadian dollar, Swedish krona, Swiss franc and Japanese Yen. When the US dollar increases in strength, the USDX goes up.

1.1 Background of the study:

Gold is one of the most popular commodity that is famous for its yielded good return which has a tendency to fluctuate which makes it more attractive to the risk averse investors to cover themselves from the untrusted global economy so, there is a need of keeping the close look into the gold market through different angles that mostly help investors portfolios to protect global purchasing power, reduce portfolio volatility and minimize losses during periods of market shock.It can serveas a high-quality, liquid asset when selling other assets would cause losses.On a free market, the gold rate is determined by supply and demand. Major factors are the central banks who can sell and buy gold in large quantities as a monetary policy, the state of the national and world economy, international conflicts and crises, demand for jewellery, by the industry and investors. .

1.2 Problem statement:When the economic situation is weak with most investments providing low returns,investors are likely to put their money in gold.Gold hedging against the global instability and inflation is the traditional wisdom,this wisdom is usually correct but some time timing of buying and selling never results in profitable because things never remains in same direction every time.It is very important to look wisely into the behavior of gold in relation to Crude oil,Dollar index.

1.3 Research objective:Since price changes are crucial importance for commodities investors,relationship between crude oil and dollar index are examined in detail to establish if price of one variable can fuel prices of another.This research will conclude the extend of relationship of gold with Crude oil index Dollar Index.To study and analyze the impact of dollar Index on gold prices.

To study and analyze the impact of Prices of crude oil on the gold prices.

1.4 Research Design:

The yearly sample spans from december 1995 to december 2014 inclusive of 20 observations for each series. The nominal crude oil price is chosen as the representative of the world oil price. (quoted in US dollar) is acquired from the econ.worldbank.org The nominal gold price selected for evaluation is the econ.worldbank.org. Value of Dollar index is acquire from the website of federalreserve(federalreserve.org).

1.5 Importance of Research:

There are a number of distinctive qualities that separate gold from the rest of the commodities, such as the U.S. dollar is weakening, Inflation fears, Emergence of China and India, Supply constraints, Geopolitical instability. But gold is viewed as a safe haven during times of political or economic calamity.Since price changes are of crucial importance for commodities investors, relationship between crude oil and dollar index are examined in detail to establish if price of one variable can fuel prices of another. This research will conclude the extent of relationship of gold with Crude oil index Dollar Index.

1.7 Scope of the study:

Discussion of the topic is benificial for investors, traders, policymakers and producers when they play catch up with each other and when they have feedback relationships with oil and dollar index.

2. LITERATURE REVIEW

RELATIONSHIPS AMONG CRUDE PRICE, GOLD PRICE AND STOCK MARKET-AN EVIDENCE OF BOMBAY STOCK EXCHANGE

This paper investigates the connections among oil value, gold value and stock exchange in India. Expanding oil costs will build the expense of production that will influence money stream and will lessen stock costs. Indian speculators are showing uncase in the stock exchanges because of ceaseless climbing of gold costs by virtue of no future misfortune. In any case, this study is focused around optional information acquired from different information sources including BSE database and World Gold Council database for the period from January 2, 1991 to October 31, 2012. Sometime during investigation, Johansen cointegration examination and Granger causality test have been planned. Johansen cointegration test outcome demonstrates that there exists a long haul relationship among the chose variables. Granger causality test outcome demonstrates that there must be either bidirectional or no causality among the variables.1RELATIONSHIPS AMONG CRUDE PRICE, GOLD PRICE AND STOCK MARKET-AN EVIDENCE OF BOMBAY STOCK EXCHANGE by Dr. Amalendu Bhunia

ANALYSIS OF THE RELATIONSHIP BETWEEN OIL AND GOLD PRICES

This article concentrates on the relationship in the middle of oil and gold prices. The point of this article is to focus the character of the co-development between value levels. This article additionally shows the fundamental trademark and determinants of current value patterns. This work utilizes routines for examination and amalgamation of hypothetical learning from writing, distributed articles and different distributions. There is likewise incorporated a quantitative examination of the variables, for example, Granger causality test, Johansen cointegration test and Vector Error Correction model. This paper uncovers the presence of a long haul relationship between focused variables.2ANALYSIS OF THE RELATIONSHIP BETWEEN OIL AND GOLD PRICES by Jana imkov

OIL AND GOLD PRICES: CORRELATION OR CAUSATION?

This research explains the month to month information from Jan-1986 to April-2011 to examine the relationship between the costs of two key things: gold and oil. They analyze this relationship through the inflation channel and their communication with the record of the US dollar. They utilize diverse oil value intermediaries as a part of their examination and find that the effect of oil cost on gold cost is not deviated however non-straight. Their results demonstrate that there is a long-run relationship exists between the costs of oil and gold. Their findings conclude that the oil cost can be used to anticipate the gold cost.3OIL AND GOLD PRICES: CORRELATION OR CAUSATION? by Thai-Ha Le and Youngho Chang

A STUDY ON IMPACT OF SELECT FACTORS ON THE PRICE OF GOLD

The speculators dependably search for the different ventures which build their risk-balanced returns and include expansion. Since ages, gold is favored as the one of the significant venture alternative particularly by the Indian financial specialists. The costs of the gold are expanding and the cost of the gold is influenced by the different variables. This paper is fundamentally reflects the elements like conversion scale of US dollar with Crude oil costs, repo rate and inflation rate. Each of the components is examined with the gold costs. The relationship between the variable and the gold costs is pointed in this paper. There is a reverse connection between the US dollar and gold costs. The oil costs have an effect on the gold costs. Gold costs and repo rates are related. Gold costs and inflation rates are additionally subordinate and absolutely connected.4A STUDY ON IMPACT OF SELECT FACTORS ON THE PRICE OF GOLD by Dr. Sindhu

STUDY ON DYNAMIC RELATIONSHIP AMONG GOLD PRICE, OIL PRICE, EXCHANGE RATE AND STOCK MARKET RETURNS

The dynamic and complex relationship among financial variables has pulled in the analysts, approach producers and specialists alike. This study is an endeavor to test the element relationship among gold price, stock returns, foreign exchange and oil price. All these variables have seen critical changes over the long haul and thus, it is completely important to approve the relationship gradually. This study takes day by day information from 2nd January 1998 to 5th June 2011, constituting 3485 perceptions. Utilizing procedures of time arrangement the study attempted to catch dynamic and stable relationship among these variables using vector autoregressive and cointegration procedure. The results demonstrate that foreign exchange is profoundly influenced by changes in different variables. However, stock exchange has less parts in influencing the foreign exchange. In this study they tried two models and one model recommends that there is weak long term relationship among variables.5STUDY ON DYNAMIC RELATIONSHIP AMONG GOLD PRICE, OIL PRICE, EXCHANGE RATE AND STOCK MARKET RETURNS by K. S. Sujit and B. Rajesh Kumar

CO-MOVEMENTS OF OIL, GOLD, THE US DOLLAR, AND STOCKS

This paper reflects the co-developments of various macro-variables in the world economy over a span of more than twenty years. Long-term co developments are analyzed by following the cointegration, common trend factor and the spill- er index over these variables (gold price, stock price, conversion rate for dollar and the oil price). Preminary examination recommends the likelihood of cointegration among these variables showing co-developments, despite the fact that the overflow indices are discovered to be little.6CO-MOVEMENTS OF OIL, GOLD, THE US DOLLAR, AND STOCKS by Subarna K. Samanta and Ali H. M. Zadeh

CASUAL OR CAUSAL RELATIONSHIPS BETWEEN US DOLLAR, GOLD, OIL AND EQUITY MARKETS

This paper reflects the level of correlation, negative or positive, and possible causation between the costs of gold, oil, U.S. common stocks and the U.S. currency value against the Euro and British Pound. The information set, as characterized in subtle element beneath, uses every day value changes for the eleven year period from the earliest starting point of 1999 to the end of 2009 and yearly subintervals inside that period. The reason for the research gets from some generally held latest outcomes based on correlations, and related presumptions, with respect to connections between the 4 variables, positive or negative, moderately predictable, however not the same as long term information results, in the recent financial crisis tenure from 2007 through 2009. The study takes a more authentic point of view and draws results with respect to how solid, or frail these connections may be and whether they appear to be interim, and potentially a distortion, or a pattern that is liable to proceed. Articles focused around latest perceptions, in the course of recent years, in the financial press recommend a reverse relationship between stock prices and the U.S. dollar; oil and the U.S. dollar, gold prices and the U.S. dollar. They analyzed the relationship, long and short between these variables for potential use in expectation models furthermore, as could reasonably be expected portfolio enhancement instruments. They have additionally included information on the relationship in the middle of short and long term premium rates and the dollar for reference.7CASUAL OR CAUSAL RELATIONSHIPS BETWEEN US DOLLAR, GOLD, OIL AND EQUITY MARKETS by Ron Christner and Mehmet F. Dicle

GOLD AND THE U.S. DOLLAR: TALES FROM THE TURMOIL

In this research they investigate how the relation between gold prices and the U.S. Dollar has been aected by the recent turmoil in nancial markets. They use spot prices of gold and spot bilateral exchange rates against the Euro and the British Pound to study the pattern of volatility spillovers. They estimate the bivariate structural GARCH models proposed by Spargoli e Zagaglia (2008) to gauge the causal relations between volatility changes in the two assets. They also apply the tests for change of co-dependence of Cappiello, Gerard and Manganelli (2005). They document the ability of gold to generate stable comovements with the Dollar exchange rate that have survived the recent phases of market disruption. Their ndings also show that exogenous increases in market uncertainty have tended to produce reactions of gold prices that are more stable than those of the U.S. Dollar.8GOLD AND THE U.S. DOLLAR: TALES FROM THE TURMOIL by Massimiliano Marzo and Paolo Zagaglia

DETERMINATION OF FACTORS AFFECTING THE PRICE OF GOLD: A STUDY OF MGARCH MODEL

As of late, increment of the gold costs pulls in investment again together with the influences of the most recent financial crisis. Principle goal of this study is to focus variables influencing the gold costs. The study incorporates monthly information between June, 1992 and March, 2010. Oil costs, USA exchange rate, USA inflation rate, USA real interest rate information are included in the model as variables. As per empirical results, most noteworthy connection is found between gold costs and USA exchange rate adversely. Besides, a positive relationship is found between gold costs and oil costs.9DETERMINATION OF FACTORS AFFECTING THE PRICE OF GOLD: A STUDY OF MGARCH MODEL by Cengiz Toraman, aatay Baarr and Mehmet Fatih Bayramolu

THE RELATIONSHIPS AMONG STOCKS, BONDS AND GOLD: SAFE HAVEN, HEDGE OR NEITHER?

This paper applies a multivariate GARCH model to examine the association among gold, stocks and bonds cost. Furthermore, the researchers examine the relationship among gold and oil cost to check whether gold could store quality amid financial crisis. The experimental results demonstrate that gold is a hedge for stocks for the full specimen period. Subsequently, gold is a decent enhancement instrument for stock venture. About the relationship between gold and oilvalue, this paper finds that gold has store-quality capacity. Amid the financial crisis period, gold is a safe haven for bonds just when the advancements stream from gold to bond market. On the relationship between oil cost and gold, it is discovered that gold is no more a fine item to control inflation. Despite the fact that the direction and span are not indistinguishable, the drive reactions among gold, stock and bond markets are fleeting. Quickly, there exists a relatedness in between gold and stocks and gold and bonds. Normally, gold is a suitable product to hedge against stock markets; whilst amid financial crisis duration, gold is not a safe haven for stocks.10THE RELATIONSHIPS AMONG STOCKS, BONDS AND GOLD: SAFE HAVEN, HEDGE OR NEITHER? by Shu-Mei Chiang, Chi-Tai Lin and Chien-Ming Huang

HYPOTHESIS:

Hypothesis a: rise in the oil price does not leads to a rise in the gold price.

Hypothesis b: rise in the Dollar Index does not leads to drop in gold price.

Data and analysis:Gold/Crude oilHypothesis rejected:Since the correlational value between Gold and crude oil price is +0.927(Strong Positive Correlation) which means when price of the crude oil rises the gold price will also move in the same direction and vice-versa.Correlations

GoldOil

GoldPearson Correlation1.927**

Sig. (2-tailed).000

N2020

OilPearson Correlation.927**1

Sig. (2-tailed).000

N2020

**. Correlation is significant at the 0.01 level (2-tailed).

Gold/USDXHypothesis rejected:Since the correlational value between Gold and USDX is -0.602(Moderate Negative Correlation) indicates that increase in the dollar index will lead the gold into opposite direction and vice versa.

Correlations

GoldUSDX

GoldPearson Correlation1-.602**

Sig. (2-tailed).005

N2020

USDXPearson Correlation-.602**1

Sig. (2-tailed).005

N2020

**. Correlation is significant at the 0.01 level (2-tailed).

Conclusion:This research project conducts an investigation about the co-move- ments of three economic variables over a period of time. These variables are: World Gold price, World Crude Oil price, US Dollar Index(USDX). Using yearly data for over twenty years (Nominal prices), it examines the existence of Correlation. Initial statistical re- sults indicate the possible existence of co-movements among Gold and Crude Oil exist with the calue of +0.927 however,Gold and Dollar seems to be fail in making strong negative correlation with the value of -0.602. It seems likely that Crude oil and gold price are more likely to influenced by eachother while the Dollar Index and Gold likely to move on their own.