Abstract
We examine the predictive value of gold-to-silver and gold-to-platinum price ratios, as proxies for global risks affecting the realized variance (RV) of oil-price movements, using monthly data over the longest available periods of 1915:01–2021:03 and 1968:01–2021:03, respectively. Using the two ratios, we find statistically significant evidence of in-sample predictability for increases in RV for both ratios. This finding also translates into statistically significant out-of-sample forecasting gains derived from these two ratios for RV. Given the importance of real-time forecasts of the volatility of oil-price movements, our results have important implications for investors and policymakers.
Highlights
Gold is a consumption good, and a good for investment, especially during severe financial distress when the values of many assets drop sharply but the gold price increases
The gold-to-silver and gold-to-platinum price ratios should be largely unaffected by consumption shocks, and variations should reveal variations in risk, implying that the two ratios could serve as alternative proxies for a key economic state variable [2,3,4]
We examined the predictive value of the gold-to-silver and gold-to-platinum price ratios, which serve as proxies for risks, for the realized variance (RV) of oil-price movements using monthly data for the sample periods 1915:01–2021:03 and 1968:01–2021:03
Summary
Gold is a consumption good, and a good for investment, especially during severe financial distress when the values of many assets drop sharply but the gold price increases. The gold-to-silver and gold-to-platinum price ratios should be largely unaffected by consumption (jewelry demand) shocks, and variations should reveal variations in risk, implying that the two ratios could serve as alternative proxies for a key economic state variable [2,3,4] Given this hypothesis, the objective of our research is to analyze the forecastability of the volatility of oil-price movements, as measured by monthly realized variance (RV), based on the information content of gold-to-silver and gold-to-platinum price ratios, by undertaking a historical analysis of the monthly West Texas Intermediate (WTI) oil price over the periods 1915:01–2021:03 and 1968:01–2021:03, respectively. We look at the gold-to-platinum price ratio and add the gold-to-silver price ratio for forecasting oil RV, given that silver shares similar properties with platinum from the perspective of consumption
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