Revisiting gold price behaviour: a structural VAR

Abstract

This article looks to shed some light on a fluctuating commodity price and gold production. In this regard, a structural vector autoregression (VAR) was applied to observe the sensitivity of the gold price and future pricing due to changes in macroeconomic variables, and also to review changes in macroeconomic variables due to changes in the gold (commodity) price. The variables used for decomposition were the gold price, the oil price, the real effective exchange rate of the United States (US), the US Federal funds rate, and the total combined gross domestic product (GDP) of the Organisation for Economic Co-operation and Development (OECD) countries. Impulse response functions, with shocks to each system, was investigated, and the forecast error variance decomposition was examined. The main results over a period of 10 years show that a shock to OECD GDP caused the gold price to increase, thus showing a positive correlation between economic output and the gold price. A shock to the oil price caused the gold price to spike over the short term, then move sideways over the long term. A shock to the US Federal funds rate caused the gold price to spike over the short term, then decrease slightly over the medium and long terms; while a shock to the real effective exchange rate of the US caused the gold price to be relatively flat and move sideways. The results show that the relationship between gold and other relevant factors are not just a simple monetary relationship as many previously assumed. The relationship between gold and oil is still dynamic, whereas exchange rate shocks might not be as significant as previously thought.