Can gold prices forecast the Australian dollar movements? (2013)
This paper assesses whether the gold price can help in predicting the Aussie Dollar/Us Dollar nominal and real exchange rates. The models are tested using cointegration and error correction models. The accuracy of the predictions is assessed using root mean square errors and the U-Theil ratios and a random walk is used as a base case to judge their accuracy against.
They find that the relationship between the Aussie Dollar/Us Dollar and gold is as expected. A 1% increase in the price of gold causes a 0.55% appreciation in the exchange rate. The out of sample forecasts of the nominal exchange rate using lagged gold prices as explanatory variables outperforms a random walk at all forecast horizons. Gold prices are also shown to have predictive power for the real exchange rate.
Data: Daily Demeaned Gold price returns using COMEX cash gold prices and Aussie Dollar/Us Dollar 2000 – 2013 from Bloomberg
Full Citation: Apergis, N. (2013) Can gold prices forecast the Australian dollar movements? International Review of Economics and Finance.
Abstract: This paper explores whether gold prices have a reliable out-of-sample relationship with the Australian dollar/US dollar nominal and real exchange rates using daily and quarterly data, respectively, spanning the period 2000–2012. Through an Error Correction Model (ECM), the empirical findings suggest that the out-of-sample predictive ability is strong and robust across short- and long-run horizons. The results could offer informational availability for monetary policymakers, hedge fund managers and international portfolio managers. They also provide additional support to the hypothesis that both markets are driven by the same information sets.