Forecasting Gold Prices Using Multiple Linear Regression Method

Abstract

Problem statement: Forecasting is function in management to assist decision making. It is also described as the process of estimation in u nknown future situations. In more general term it is commonly known as prediction which refers to estimation of time series or longitudinal type data. Gold is precious yellow commodity once used as money. It was made illegal in USA 41 years ago, but is now once again accepted as potential curre ncy. The demand for this commodity is on the rise. Approach: Objective of this study was to develop forecasti ng model for predicting gold prices based on economic factors such as inflation, currency pri ce movements and others. Following the melt-down of US dollars, investors are putting their money in to gold because gold plays an important role as stabilizing influence for investment portfolios. Du e to the increase in demand for gold in Malaysian and other parts of the world, it is necessary to de velop model that reflects the structure and patte rn of gold market and forecast movement of gold price. The most appropriate approach to the understanding of gold prices is the Multiple Linear Regression (M LR) model. MLR is study on the relationship between single dependent variable and one or more independent variables, as this case with gold price as the single dependent variable. The fitted model of MLR will be used to predict the future gol d prices. A naive model known as forecast-1 was considered to be benchmark model in order to evaluate the performance of the model. Results: Many factors determine the price of gold and based on a hunch of experts, several economic factors h ad been identified to have influence on the gold prices. Variables such as Commodity Research Bureau future index (CRB); USD/Euro Foreign Exchange Rate (EUROUSD); Inflation rate (INF); Money Supply (M1); New York Stock Exchange (NYSE); Standard and Poor 500 (SPX); Treasury Bill (T-BILL) and US Dollar index (USDX) were considered to have influence on the prices. Paramet er estimations for the MLR were carried out using Statistical Packages for Social Science package (SP SS) with Mean Square Error (MSE) as the fitness function to determine the forecast accuracy. Conclusion: Two models were considered. The first model considered all possible independent variables . The model appeared to be useful for predicting the price of gold with 85.2% of sample variations i n monthly gold prices explained by the model. The second model considered the following four independent variables the (CRB lagged one), (EUROUSD lagged one), (INF lagged two) and (M1 lagged two) to be significant. In terms of prediction, the second model achieved high level of predictive accu racy. The amount of variance explained was about 70% and the regression coefficients also provide means of assessing the relative importance of individual variables in the overall prediction of g old price.