Unemployment as a Determinant of Gold Prices: Empirical Evidence

Abstract

This objective of this econometrics study is to utilize Pesaran’s (2001) Bounds Test to cointegration to study the relationship between gold prices and the US unemployment rate, using three different periods of monthly observation, Model I: 1978-2016, Model II: 1990-2016, and Model III: 2008-2016. Results reveal that there is a long run relationship between the price of gold and unemployment in Models II and III, with Model III representing the strongest and most significant relationship. During 2008-2016 the price of gold increases by 4.7% for every 1% change in the unemployment rate, ceteris paribus. The short run adjustment process however, is stronger between 1990-2016 than between 2008-2016. On the other hand, there is no observed no long run cointegrated relationship between the price of gold and unemployment during the 1978-2016 period. This direct relationship between gold price and unemployment has not been studied in the literature, so further work in this area may lead to greater insight into the impact of this macroeconomic variable on the price of gold.

Keywords: Cointegration, Gold, Unemployment, Exchange Rate, VIX

JEL Classification: E42, L7, N5