I have written extensively here about cointegration between gold-miners and gold ETF's (GDX vs GLD), as well as between energy companies and oil ETF's (XLE vs USO). (See, for e.g., this article, or this article.) On another occasion, I also commented on an Economist magazine article about the possible cointegration between bond yield and oil prices. However, my fellow blogger Yaser recently pointed out an interesting link between gold and oil also. The reasons why gold and oil may be cointegrated are very similar to that of bond yield and oil: as oil price rise a) the oil revenue is invested heavily in gold, therefore pushing up gold price; b) there is an upward pressure on inflation, which increases the appeal of gold as an inflation hedge.
I did a cointegration analysis between gold and oil prices, and though their spread certainly looks somewhat mean-reverting since the 90's, it doesn't pass the cointegration test. The reason may simply be that this spread mean-reverts at a glacial pace: I estimate that the half-life (see my explanation of this term here) is over 14 months. Therefore, it may require historical data back to the 1970's to convince ourselves of their cointegration. (My own data on crude oil and gold prices only go as far back as the 1990's. If any reader knows of historical data source that goes back further, please let me know.) If, however, one is willing to take their cointegration by faith despite the inadequate data, then one may believe that gold is currently (as of Feb 12, 2007) just slightly undervalued relative to oil (the spread is about $8). I certainly don't recommend entering into a position on either side at this point!
I enjoy reading your blog.
here is a source of monthly gold prices for 1968-1999
click on the appropriate buttons for monthly 1968-1999 and view the data
and monthly west texas crude oil prices back to 1946
by the way, if oil becomes scarcer, shouldn't the ratio oil/gold increase even if they are cointegrated? Gold on the other hand isn't "consumed", there is more and more all the time.
Thank you so much for your data sources.
Regarding your question: if oil/gold ratio increases monotonically, they will not remain cointegrated. Maybe your observation is an argument that they shouldn't be over the long term!
Don't thank me, thank Google.
I've often thought closed end bond funds and a similar open-end fund should cointegrate (even before I knew what cointegration was). But what about something even more similar, like RDS-A and RDS-B? Some days one will rise and the other fall, but clearly that cannot continue.
Yes, for sure a pair like RDS-A and RDS-B should cointegrate. In fact, I will take a look at them soon.
yes, for some reason after being tightly coupled for a while, the last 3 months, RDS-A has outperformed RDS-B. I don't know if this is occurring, but could this be due to RDS-A being bought back on the open market, but not RDS-B?
I am an independent researcher and currently studying VAR model, co-integration etc. I just gone through your blog on the same subject. What I want is to replicate your analysis, so that I would get better understanding on the co-integration. Can I have you data that you used exactly here? Your help will be highly appreciated.
I use a service called Quotes Plus to obtain my historical futures data. See http://www.great-stocks.info/.
The german Bundesbank provides daily London 4pm fixings of Gold (in US$) going back to 1968 in the statistics section of its page.
Post a Comment