The Determinants of Gold Rice in US Dollars and Lebanese Pounds
Authors:   , Karibian Levon 
Published: July 2024

Gold is a scarce commodity and has become a rare metal; currently, 165,000 metric tons of gold exists above ground. Between 1870 and 1900 all major industrial countries, other than China, switched to the gold standard, linking their currencies to gold; hence, the gold standard was adopted. The present research project aims to study and analyze the relationship between gold prices on one hand, and the Brent oil prices, the Dow Jones Industrial Average (DJIA), Consumer Price Index (CPI), and Euro/USD exchange rate, on the other hand. The study manifests numerous findings as well as the interesting and important relationship of the aforementioned assets. Taking into consideration Toros Sajian’s (2006) empirical study about the price determinants of gold, a comparison was made and unit root tests were carried out on his sample (January 1997-March 2005), as well as on our sample. Elasticities on the log-levels and levels, with and without lagged dependent variables, were calculated and our estimates were found to be close to his estimates. However, the results of Toros were not reliable because of non-stationarity. This was proved by the Durbin-Watson statistics and the Durbin’s h statistics, as well as the Augmented Dickey-Fuller tests. Thus, we rejected the null hypothesis that there is no serial correlation in residuals. Furthermore, we conducted the ADF test on the sample of Toros. All the values and their respective probabilities indicated that we do not reject the null hypothesis that there is a unit root. Therefore, we estimated regressions in first differences of the logs and thus, we conducted a multiple regression of the first difference of the logs of the four independent variables on the sample of Toros. We found that the USD/EUR exchange rate was the only significant predictor of gold prices. We provided the descriptive statistics for his sample and analyzed the regression. We also tested for normality, linearity, and heteroscedasticity. Later, we conducted an ANOVA F-test to examine whether omitting the insignificant variables was a good choice and thus it was proved to be a good choice. Coming to our sample which ranged from September 1985 till November 2010, we used the same steps. We tested for the hypothesis whether there is at least one independent variable that explains gold price in US Dollars. We found the USD/EUR exchange rate and the Brent oil prices to be the significant predictor of gold prices. The DJIA and CPI were proved to be insignificant predictors of gold price. By taking into consideration the F-test and the ANOVA F-test on the R-Squares on removing the insignificant variables, we failed to reject the null hypothesis that the omitted variables have zero coefficients. However, using the same F-test and ANOVA F-test, we found that there is at least one variable that explains significantly the gold prices. In the last section, again a multiple regression was carried out but by using Lebanese Pounds as the base currency instead of the US Dollars. As for the exchange rate, the LBP/EUR exchange rate was used instead of the USD/EUR exchange rate. All the variables were significant predictors for gold prices except for the Dow Jones Industrial Average (in LBP). By taking into consideration the F-test and the ANOVA F-test on the R-Squares on removing the insignificant variables, we failed to reject the null hypothesis that the omitted variables have zero coefficients. However, using the same F-test and ANOVA F-test, we found that there is at least one variable that explains significantly the gold prices. Besides the four independent variables that we used in our study, there are several other indicators that could be taken into consideration in future research, such as world political situation (disturbances, wars, threats, invasions, etc.), supply and demand factors, market interest rates, tax rates, jewelry demand. All these are factors that could, most probably, affect gold prices.