Modeling and Forecasting the Price of Gold

Does modeling gold price relationships with other variables based on entire distributions differ from that based only on distribution means? In their May 2012 paper entitled “Is Gold Overpriced?”, Lingjie Ma and George Patterson apply a quantile regression model (considering effects across the distribution) to investigate long-run relationships between the price of gold and various economic and financial variables. Specifically, they relate gold price to lagged quarterly nominal U.S. GDP growth rate, lagged monthly U.S. unemployment rate, monthly U.S. inflation rate, U.S. dollar index, monthly Dow Jones Industrial Average (DJIA) return, 3-month U.S. Treasury bill (T-bill) yield and monthly West Texas Intermediate crude oil spot price. They compare quantile regression results to those from a conventional Ordinary Least Squares (OLS) model (which focuses on distribution averages). Using daily London P.M. gold prices in dollars per ounce and values for the selected predictive variables from April 1968 (when the price of gold began to move freely) through March 2012, they find that: (more…)