Research proposal

AREA: Finance
Subject:Commodity Market

TOPIC
Gold 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 Hassan

MBA-R
ID# 8448
submitted 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 serve as 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.1
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.2
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.3

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

1RELATIONSHIPS AMONG CRUDE PRICE, GOLD PRICE AND STOCK MARKET-AN EVIDENCE OF
BOMBAY STOCK EXCHANGE by Dr. Amalendu Bhunia

2ANALYSIS OF THE RELATIONSHIP BETWEEN OIL AND GOLD PRICES by Jana imkov
3OIL AND GOLD PRICES: CORRELATION OR CAUSATION? by Thai-Ha Le and Youngho Chang

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.4
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.5
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.6

4A STUDY ON IMPACT OF SELECT FACTORS ON THE PRICE OF GOLD by Dr. Sindhu

5STUDY ON DYNAMIC RELATIONSHIP AMONG GOLD PRICE, OIL PRICE, EXCHANGE RATE AND STOCK
MARKET RETURNS by K. S. Sujit and B. Rajesh Kumar

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.7
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.8

7CASUAL OR CAUSAL RELATIONSHIPS BETWEEN US DOLLAR, GOLD, OIL AND EQUITY MARKETS by
Ron Christner and Mehmet F. Dicle

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.9
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 oil
value, 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.10

9DETERMINATION OF FACTORS AFFECTING THE PRICE OF GOLD: A STUDY OF MGARCH MODEL by

Cengiz Toraman, aatay Baarr and Mehmet Fatih Bayramolu

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 oil
Hypothesis 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
Gold
Gold

Pearson Correlation

Oil
1

Sig. (2-tailed)

.000

N
Oil

.927**

Pearson Correlation
Sig. (2-tailed)

20

20

.927**

.000

20

20

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

Gold/USDX
Hypothesis 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
Gold
Gold

Pearson Correlation

USDX
1

-.602**

Sig. (2-tailed)
N
USDX

Pearson Correlation
Sig. (2-tailed)
N

.005
20

20

-.602**

.005
20

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

20

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.