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10 September 2009
Analysts looking to capitalise on the suspected relationship between the oil and gold markets need to look closely at when the contracts on the futures market mature, Deakin University research has shown.
Professor of Finance, Paresh Narayan, who looked at the link between the oil and gold spot markets between 1963 and 2008 in the US and presented the findings of the study at a seminar in Geelong recently, said analysts and academics have long debated whether there is a relationship between the price for oil and the price for gold and whether the market price for oil can be used to predict the price for gold.
“Basically the argument goes that when oil prices rise, prices of other goods rise which then has an effect on inflation. When inflation goes up people invest in gold to protect (hedge) the value of their money. So the price of gold rises.
“We wanted to know more details about the relationship given that between 2002 and 2008 the price of gold rose about 18.5 per cent and crude oil rose 53.9 per cent. For instance, does the oil market lead the gold market and if so can the price of oil be used to predict the price of gold?”
The answer to these questions would assist both economists and analysts, Professor Narayan said. “From the economists’ perspective a long-run relationship would mean that both markets are inefficient and for the analyst such a link would allow a degree of predictability in their investments,” he said.
Professor Narayan said the analysis of the markets had shown that there was indeed a long-run relationship between the gold and oil futures markets.
“Unlike other studies, we examined the gold and oil spot and future prices at different maturities, at the one month, two months, three months, four months, up to 10 months.
“As a result of this we found that gold and oil spot futures markets up to the maturity of 10 months share a long-run relationship.
“Investors do use the gold market to hedge against inflation, which results from a rise in oil prices. The rise in oil prices leads to a rise in inflation which translates to higher gold prices.
“Over the long-term the oil market can be used as a predictor of gold prices, however analysts need to consider when the different futures contracts mature.
“This is potentially a significant piece of knowledge for investors, for knowing the relationship between contract maturities in the gold and oil markets allows speculators to predict returns and hedgers to protect their investments accordingly.”
Professor Paresh Narayan
School of Accounting, Economics and Finance
03 9244 6180