1. GOLD, OIL AND THE EURO: HYPOTHESES AND TIME SERIES ANALYSIS A. G. Malliaris and Mary E. Malliaris Loyola University Chicago The Athenian Policy Forum and the Indian Institute of Management Kozhikode Conference, Calicut, India, December 18-20, 2008.

2. Outline General Comments About Gold, Oil and the Euro These Markets Prior to the Creation of the Euro How are these Markets Related Since the Creation of the Euro

3. Gold As an Anchor of the Gold Standard As a Hedge Against Inflation As a Free Commodity Since mid-1971

4. Long-Term Gold Price

5. Oil Significant Commodity in Global Economy Its role today is somehow lesser than in early 70s but still important Extremely volatile

6. Long-Term Oil Price

7. The Euro Start with the European Common Market in 1957 From a Customs Union to One Market One Market with One Currency

8. The Creation of the Euro

9. Daily Data since 1999

10. Hypotheses Do these 3 Markets follow Random Walks? The twin U.S. deficits weaken the dollar and strengthen the euro and induce oil producers to demand compensation. Increases in oil prices impact gold prices.

11. Time Series Methods Are the euro, oil and gold co-integrated? Are there any short- and long-term relationships between the euro, oil and gold?

12. Augmented Dickey-Fuller Tests of Stationarity The model is:

13. Price Level (LN(X)) Only LagsLags and Constant Lags, Constant, and Trend Gold No lags2.3611110.667188-2.836540 5 lags2.3637080.693961-2.843861 20 lags2.3737040.766124-2.862830 Oil No lags1.191509-0.626496-2.759707 5 lags1.313748-0.461972-2.541877 20 lags1.368074-0.235474-2.456710 Euro No lags0.631741-0.079099-3.034661 5 lags0.659061-0.049944-3.063701 20 lags0.521473-0.293593-2.657669

14. First Price Differences (LN(X t ) - LN(X t-1 )) Only LagsLags and Constant Lags, Constant, and Trend Gold No lags-46.65579-46.77877-46.81729 5 lags-18.68709-18.86720-18.93417 20 lags-9.389532-9.698579-9.833956 Oil No lags-45.22329-45.25046-45.24871 5 lags-19.52137-19.57521-19.58983 20 lags-10.21073-10.31103-10.35710 Euro No lags-46.05127-46.07716-46.10367 5 lags-17.92471-17.97228-18.02022 20 lags-9.111516-9.214248-9.259299

15. Engle and Granger Test of Cointegration of LN(Price) Dependent Variable (X) Independent Variable (Y) b0b0 t-stat GoldOil-0.009211-2.920998 OilGold-0.010399-3.122336 GoldEuro-0.003219-1.723030 EuroGold-0.003753-1.950192 OilEuro-0.006973-2.584827 EuroOil-0.006324-2.512779

16. Error-Correction Model (ECM) for Testing for Long-Term and Short-Term Relationship The model is:

17. Results of Time Series Analysis Random Walks Confirmed Cointegration Confirmed Oil Prices are Driven by Gold and the Euro

18. From Time Series to Neural Network Dependent VariableReg. Top 5 VariablesNN Top 5 Variables Euro LEuroM1 LnGoldM1LGoldM1 LGoldM2 LEuroM3LOilM1 LEuroM4LOilM2 Oil LOilM1 LEuroM5LOilM2 LGoldM1 LEuroM3LGoldM2 LGoldM3LEuroM5 Gold LGoldM1 LOilM1 LOilM2 LEuroM2LGoldM2 LEuroM4

19. Conclusions From Old Independent Relationships To New Interrelated Relationships