RESEARCH PAPER

Title: Relationship Between Dollar, Gold And Oil Prices

Subject: International Financial Management
Guided by: Prof. S.K Vaze

Submitted by:
Shantam Jain 19020241057
Aayush Kumar Rauniyar 19020241060
Dhruv Modi 19020241062
Ojas Dipan 19020241063
Umang Pasari 19020241065
Tanya Yajjala 19020241069
Soltmann Thomas 19020241134
TABLE OF CONTENTS

ABSTRACT 3
Objective 3
Data Collection 3
Data Analysis 4
Findings
1. Introduction 4

2. A glance at the existing literature 5

A. Oil vs Gold Price 5

B. U.S Dollar vs Gold Price 6
C. Dollar vs Oil 7
3. Data and Theoretical Analysis

A. Presentation of Data 9
B. Analysis of Relationship between:
i. Oil vs Gold Price 9
ii. Dollar vs Gold 11
iii. Oil vs Dollar 13

4. Observation and Conclusion 15

5. Bibliography 16
ABSTRACT

Objective: The mission is to study the relationship between oil and gold prices as it can change
the world and the way it functions. Gold and oil address the most exchanged things in the world.
Specialists have what's all the likewise beginning late began to hold platinum as a decision as
opposed to gold. Gold and silver have correspondingly routinely been utilized as a store of
goliath worth and vehicle of trade. We take a gander at the association between the oil esteem,
expenses of important metals (gold, silver, and platinum) and the US dollar/British Pound
transformation standard using parametric and non-parametric showing over a 135-year time
range. The changes standard shows non-linearities. The relationship between significant metal
expenses and the oil cost is certain and generally extending after some time, while the LL
estimates for the change scale are negative and thereafter positive and significantly non-straight

Data Collection: The data has been collected from the following sources
a) Recent year’s research papers.
b) The current oil prices and their fluctuations through different websites.
c) We collect spot prices of oil and gold in accordance with the inflation rates of the
countries and their fluctuations

Data Analysis: The Data is analyzed using R Studio. We have to calculate the correlation and
other statistical calculations like Hypothesis,Degree of Freedom etc to come to a conclusion. A
statistical analysis can give us a better idea about the changes in oil and gold rates from the
previous year and can also help us to make predictions about the future. The pandemic has
forced us to analyse data to be able to know the future demands and requirements.
Findings: We understand the following points from the results :
a) How oil and gold prices affect each other?
b) The results that the previous studies have shown are matching our study and they are
supported
c) The country can face a lot of problems regarding the import bill as it rises due to
increasing oil prices worldwide. Our country is a net importer of oil so high oil prices
can have a destructive impact on the economy.
d) Even the prices of commodities are volatile. The commodity prices are inversely
proportional to the US Dollar.
e) Oil prices and gold prices are really important. A reduction or increase in oil price can
harm banks, industries, jobs, agriculture in a positive manner or an adverse manner.
World’s largest financial centres depend on Oil prices as they are the drivers of the
economy.
f) Oil energy can also affect the energy industry as both are interdependent.
 I. INTRODUCTION

Gold – known throughout mankind as a precious metal for decoration, as currency, and since
modern times for its useful attributes in the fields of electronics. In the finance world, gold is
known as a dead capital investment - it does not pay a dividend and therefore the success of the
investment is purely dependent on the development of the price development on the open
markets. It can be observed that gold usually is in high demand in times of crisis - this could be
a threatening high inflation rate, a financial crisis as in 2008, or a global economy-destabilizing
pandemic as recently happening. It is usually traded per ounce, which corresponds roughly to
28.3 grams.

Oil, on the other hand, is probably the most important energy carrier of the last century, which
led even to armed conflicts, like the Japanese attack on Pearl Harbour in 1941. Although oil
slowly starts to get surrogated by alternative, more environmentally-friendly fuels, it is still an
important resource for the emerging huge economies like China and India, as many industries
heavily depend on it – such as the transport sector, pharmaceutical and plastics producing
companies, to name a few. The oil production is regulated by an international cartel known as
„Organization of the Petroleum Exporting Countries'' (OPEC), which keeps prices relatively
stable. But sometimes the members disagree on their oil production quota, or the oil demand
collapses, which usually leads to serious consequences for the oil-exporting countries, as these
are rather dependent on the income from it. In 2020 the oil price has experienced a heavy
collapse due to the COVID-pandemic. Oil is traded by different sorts depending on their location
of production and is sold per barrel, which corresponds to roughly 158 litres.

So how are these resources connected? In both cases, they are globally traded in US-Dollar
(USD) as an anchor currency. While in the case of gold this is a historical relationship justified
by the former American gold standard and the Bretton Woods Agreement, the oil trade in USD
has probably developed by the USA being the biggest economy of the free world in the times of
the cold war.
 II. A GLANCE AT CURRENT SCENARIO AND REVIEW OF THE LITERATURE

A. OIL VS GOLD PRICE

Fama and French (1985) suggested that there is not an obvious linkage between oil and gold. The
price of oil is said to fluctuate the price of gold. Primarily this happens in two ways. One, the
increase in the price of oil is looked upon as inflationary.
Gold’s demand with respect to the inflation hedge increase with the prices of oil. Two, the
fluctuation in the gold’s demand by the countries exporting oil are viewed as the sources
between the gold and oil prices. The fluctuation in the revenue of oil leads to the demand of gold
by the exporters of oil for conducting smooth consumption and government expenditure.

Zheng and Narayan (2010) mentioned that to predict the gold market prices the oil market can be
used and vice versa. This gave an idea that both of these markets are jointly inefficient. Also, a
long run relationship between these two prices of different maturity levels could be observed
through the inflation channel.

Moreover, the growth in the index investment in the commodity markets since the 2000's
concurrently led to high correlation in the prices of non energy commodities futures in the US. A
significant relationship has been observed in both these popular indices. This also signifies the
financial aspect of these markets and explains the volatility in the prices of these commodities in
2008 as found by the authors Ke Tang and & Wei Xiong in (2018).

The empirical analysis of gold and oil, being the main representatives of the huge commodity
market suggested that a positive correlation of 0.93 was observed from Jan, 2000 to Mar, 2008.
A long term equilibrium was also observed by Wei and Xhang, (2010) where the change in the
crude oil prices linearly Granger caused a volatility in the prices of the gold but not vice-versa.
Both these markets also do not significantly impact the nonlinear Granger causality which
suggests fair interaction. As far as the common effective prices of these two markets are
concerned crude oil contribution is higher than gold’s prices. This is of the fact that both the PT
(Permanent Transitory) and the IS (Information Share) model suggests the impact of the oil on
the overall global development of the economy is far reaching. This has thus grabbed huge
attention over the past few years.

Using the Copula approach by Reboredo (2013) the oil-gold dependency was observed for 2000
to 2011. It was found that there is a huge positive relationship between these two which
suggested that hedging of oil against the oil price volatility can’t be done. Many different authors
also found a lot of positive relationships between these two commodities prices over the years.
 B. U.S DOLLAR VS GOLD PRICE

Gold is an asset with intrinsic value that can fluctuate over time with high volatility. When the
value of the dollar appreciates, the price of gold tends to fall in U.S. dollars. It is because gold
becomes more expensive in other currencies. As the price of any commodity increases, the
demand for the commodity declines. Oppositely, as the value of the U.S. dollar is in a
downtrend, gold tends to appreciate as it becomes cheaper in other currencies.

There is a negative correlation between the gold price and the U.S Dollar. Negative correlation
denotes the opposite movement of the variables plotted in the graph. Purchasing power parity
comes into picture when the US Dollar gets stronger, it costs lesser dollars to buy any
commodity priced in $USD and when the US Dollar gets weaker it takes more dollars to
purchase the same commodity similar to the basket of consumption.

The price of all US Dollar-denominated commodities, like gold, reflects the fact that it will take
fewer or more dollars to buy that commodity due to stronger currency. Therefore, the percentage
change in the U.S dollar can be reflected in the percentage change of gold price approximately.
Though there are other factors also that might affect the prices of gold. But very often the entire
change in the gold price is simply a mathematical recalculation or a function of a constantly
changing US Dollar value. Gold is priced in the US Dollar per troy ounce.

As per the copula model results, the relationship between gold and the US dollar seems to be
uncertain at the beginning. The negative and weaker dependence between the currencies and
gold (except for the GBP) imply that the currencies mostly deviated from their real value
especially in the crisis period. In general, it was found that fluctuations in the global price of gold
are not correlated with fluctuations in any individual currency. It, therefore, appears that gold is
not a hedge against the external purchasing power for any individual currency. This finding
implies that the global price of gold should not be used for hedging individual currency risk.
(Bedoui et al., 2019)

In 2008, the IMF estimated that 40–50% of moves in the gold price since 2002 were dollar-
related. A 1% change in the effective external value of the US dollar leads to more than a 1%
change in the gold price. First, a falling dollar increases the value of other local currencies,
which increases the demand for commodities including gold. Second, when the USD starts
losing its value compared to its trading partners, investors look for alternative investment sources
to store value, which is gold. This would cause investors to flee to safer assets, different from
USD and gold. The USD is also driven by other factors like monetary policy and inflation and
economic prospects in the USA vs. other countries. Investors and portfolio managers need to
consider all of these factors as well as historical facts.
 C. DOLLAR VS OIL

There is a hidden string that ties currencies to crude oil. With the price actions in one venue, it
forces a sympathetic or opposing reaction in the other. This correlation persists for many reasons,
including resource distribution, the balance of trade (BOT), and market psychology. Also, there
is crude oil’s significant contribution to inflationary and deflationary pressures that intensifies
these interrelationships during strongly trending periods—both to the upside and to the
downside.

Crude oil is quoted in U.S. dollars (USD). So, each uptick and downtick in the dollar or in the
price of the commodity generates an immediate realignment between the greenback and
numerous forex crosses. These movements are less correlated in nations without significant
crude oil reserves, like Japan, and more correlated in nations that have significant reserves like
Canada, Russia, and Brazil.

Oil and precious metals such as gold, silver, and platinum have received considerable attention
given the rapid financialization of commodities (Balcilar et al., 2015). The strong demand for oil
globally, coupled with the diversification of the uses of precious metals in various industries, has
sparked interest in the trade of these commodities on international financial markets. Gold and
oil represent the most actively traded commodities in the world (Baruník et al., 2016). Investors
have also recently started to hold platinum as an alternative to gold (Jain and Ghosh, 2013). The
importance of silver is reflected in its hourly trade since the 1930s in markets such as London,
Bombay, New York and Shanghai, among others. Gold and silver have also historically been
used as a store of value and medium of exchange (Jain and Ghosh, 2013; Vigne et al., 2017). The
demand for these precious metals and oil has led to price comovements and has been the focus of
a growing literature with some suggesting that price co-movements convey more reliable
information to market participants than consumer prices (Balcilar et al., 2015; Mahdavi and
Zhou, 1997).

“Surprisingly for the presence of a long-run relationship among the variables is rather weak”, but
this may reflect the fact that their study is limited to two decades. One essential point of
departure in our research is the use of historical data which goes back to the late 1800s.
Specifically, while Sari et al. (2010) use data from 1999 to 2009, our study examines a much
longer period, spanning from 1880 to 2016. Examining long-run movements in the data is
important because the relationship between the oil price, precious metals' prices and the
exchange rate may have changed over time. Using long historical time series, we can account for
the transition from the less developed financial and oil markets of the late nineteenth century
through to the highly sophisticated financial and oil markets of the second decade of the twenty-
first century.
The first globalization boom was a late nineteenth-century phenomenon (Jacks, 2005; O'Rourke
and Williamson, 2002) and, by the late 1870s, international capital markets had become
increasingly integrated (O'Rourke and Williamson, 2001; Obstfeld and Taylor, 2003, 2004). The
use of a long time series to examine the relationship between the oil price, precious metals prices
and the exchange rate provides an important historical perspective in light of these
developments, particularly given that the use of historical evidence is appropriate for the
estimation of unrestricted time-adjustment patterns (Pakes and Griliches, 1984)

Crude oil price is an important and sometimes determinant variable, for the economic
policymakers of countries that have this commodity as a main source of energy, as well as in
those where the crude oil price is part of their energy matrix. In the majority, primary commodity
prices are expressed in US Dollar, especially oil prices, not only in the commodity markets but
also in many international organizations, such as in the IMF International Financial Statistics, or
regarding indexes based on dollar prices. As such, oil prices are affected by inflation as well as
real developments, and also by the value of the US dollar exchange rate.

The relationship between oil prices and economic fundamentals has roots in the pioneering work
of Hamilton (1983). Hamilton’s work established the link between oil price increases and the US
business cycle. Several previous works by Throop (1993) and Zhou (1995) have evidenced a
relationship between oil prices and exchange rate movements. In the case of the dollar, the link is
generally found to be positive, which means that an increase in oil price goes with a dollar
appreciation. Very few of these papers then try to ask which variable causes the other. That is the
case for Amano and van Norden (1998), who show that oil price is a primary driving factor of
the long-term evolution of exchange rates in Germany, Japan, and the United States. Wu et al.
(2012) study the dynamic copula-based GARCH models to explore the dependence structure
between the oil price and the US dollar exchange rate.
III. DATA AND THEORETICAL ANALYSIS

1) PRESENTATION OF DATA

Using R Studio, we extracted three types of data sets from Datahub.io: monthly average gold
price in USD, monthly average oil price in USD, and the monthly issued interest rate of 10 year
US government bonds. The interest rate of 10 year US government bonds was chosen for two
reasons - on the one hand gold investments and the government oppose each other, especially
when high interest rates for bonds are available, as gold does not pay dividends. On the other
hand do governmental bond interest rates can possibly be seen as an indicator for inflation rates
in the US economy in the same time period.

2) ANALYSIS OF RELATIONSHIP BETWEEN:

- OIL VS GOLD PRICE

There is an unusual divergence between these two. Both these commodities though moving in
tandem have some occasional disconnects. As a result of the high oil prices there is a hike in the
price of manufacturing and transporting goods which eventually drives high consumer prices. So
more often than not high oil prices will lead to a rise in gold.

GRAPH:1 OIL VS GOLD PRICES *Source: fred.stlouisfed.org

Geopolitical instability is majorly the reason for the high oil prices. The ratio between these two
over the last 25 years has been 15.6 on an average. This implies that an ounce of gold was
equivalent to an average of 15.8 barrels of US crude oil.
The oil and gold ratio has been the lowest of 6.2 in the year 2005 when high demand for oil bull
run outperformed gold gains.

GRAPH:2 OIL VS GOLD- LINEAR REGRESSION

The highest ratio was 47.2 in the year 2016 when the prices of oil were in a slump while the gold
prices were constant.Since 2019 started the ratio has been around 23.1 on an average. The prices
of gold have risen continuously as financial investors looked upon safe assets over inflation
concerns in the US.

GRAPH:3 OIL VS GOLD- PRICE RETURN CORRELATION

Investors are also worried about the geopolitical tensions in the global economy over Middle
East and US-China disputes.
DOLLAR VS GOLD

The London Bullion Market Association (LBMA) is the professional organisation that oversees
the wholesale gold and silver markets in London, England - the centre of the world's physical
bullion trading. The LBMA sets and maintains the very highest standards in refining,
documenting and storing every gold and silver bar allowed to circulate at "spot prices" in the
professional market.

GRAPH:4 DOLLAR VS GOLD PRICES *Source: Macrotrends.net

This chart compares the daily LBMA fixed gold price with the daily closing price for the broad
trade-weighted U.S. dollar index over the last 5 years.

GRAPH:5- DOLLAR VS GOLD LINEAR REGRESSION

A rule which states that the dollar increases in value as compared to the other countries, gold
prices fall in the US. This is the primary reason that gold in other countries is more expensive.
Gold is inversely correlated to the U.S Dollar for the past years although there may have been
few discrepancies in few periods where the relationship has shown signs of positive correlation
due to the strength of moves in gold vs the strength of moves in dollar.

Higher the prices of any commodity there is a decline in the overall demand.The recession of
2008 depicts the discrepancy where, as driven by global supply vs global demand there have
been times when gold price and US dollar have risen together because investors resort to this
metal as safe haven investment in times of crisis.

- OIL VS DOLLAR

First, changes in the US Dollar exchange rate could have an effect on oil prices because of (1)
their effect on the global demand for oil, and (2) their effect on oil producers price-setting
behaviour. In particular, since oil is priced in Dollar on International Financial markets, when the
US Dollar depreciates oil becomes less expensive in terms of local currency for consumers in
non-dollar countries. This could increase their demand for oil, which in turn could lead to higher
oil prices.

GRAPH 6: OIL VS DOLLAR PRICES *Source: Bloomberg

For the past eight years, the rolling 6 month correlation coefficient was mostly negative but that
has started to change. By considering the new global energy dynamics it won’t be surprising to
see this historically negative correlation to spend enough time in this positive region.
The changing relationship between USD and oil has started to reflect the growth of the country
in the global oil industry.

GRAPH: 7 DOLLAR VS OIL LINEAR REGRESSION

The US has started to become the new swing producer of oil. The levels of production in the
country has started to impact the global oil prices. Before the shale revolution happened it was
Saudi Arabia.

GRAPH: 8 OIL VS DOLLAR- CORRELATION

An understanding of the historical inverse trading of oil prices and the weakening of the
correlation recently helps traders to make a greater informed decision about the evolution of the
global economy.
 3) OBSERVATION AND CONCLUSION

The interdependencies among oil price, gold price, US dollar and stock markets put forward
fundamental importance for either investment or managerial decisions. This study examines the
long-run relationship between US dollar exchange rates and the prices of selected agricultural
commodities. In the selected commodities, two commodities namely Gold and Crude oil share an
inverse relationship with the US dollar exchange rate.

The findings of the present study support the results of previous studies, which indicate that the
agricultural commodity prices are negatively correlated with the US dollar exchange rates i.e.
commodity price decrease with increasing US Dollar value against the Indian rupee. Our
findings show the evidence of factual effect as well as significant interactions among oil price,
gold price, and USD. Indeed, we found that oil price is significantly affected by gold and USD.
Oil price is also affected by the oil futures price. Gold price is concerned about changes in oil,
USD and stock markets but slightly depends on US oil imports and default premium. The USD
exchange rate is significantly affected by oil price, gold price and stock market prices. Indirect
effects always exist which confirm the presence of global interdependencies and highlights the
financialization process of commodity markets. We explain the obtained results by the increased
use of oil and gold as financial assets either for speculation or hedging, which intensifies direct
and indirect ties between all the markets and thus confirms that the performance of these markets
become dependent between each other.
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