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Empirical Economics

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01-12-2014

The long-run relationship of gold and silver and the influence of bubbles and financial crises

Authors: Dirk G. Baur, Duy T. Tran

Published in: Empirical Economics | Issue 4/2014

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Abstract

This paper analyzes the long-run relationship between gold and silver prices. We closely follow Escribano and Granger (J Forecast 17:81–107, 1998) and extend their study. We use a longer sample period from 1970 to 2011 and study the role of bubbles and financial crises for the relationship between gold and silver prices. We find clear evidence for a co-integration relationship between gold and silver with gold prices driving the relationship. The analysis also indicates that the results are influenced by bubble-like episodes and financial crises.

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See World Gold Council (www.gold.org) for more details.

Baur and Lucey (2010) and Baur and McDermott (2010) analyze the role of gold as a hedge and a safe haven against adverse financial events.

Batten et al. (2012)) find evidence for fractional dependency between gold and silver prices which may be exploited for trading profit.

Liu and Chou (2003) argue that spread trading may be one of the major reasons for a close relationship (see also Wahab and Cohn 1994).

We assume that fundamental factors dominate in the long run and that investor behavior can influence the relationship merely in the short run.

Escribano and Granger (1998) call the period in which the silver market was cornered, roughly between June 1979 and March 1980, by the Hunt brothers a “bubble,” but note that the period does not completely correspond to the concept of a bubble found in the financial literature (p. 82).

The data are obtained from DataStream. The mnemonics are GOLDBLN and SLVCASH. The gold price is Gold Bullion US dollar per troy ounce and the silver price is Silver Fix cash US dollar cents per troy ounce.

We follow the terminology used by Escribano and Granger (1998) and call this period a “bubble.”

An alternative specification with silver prices on the left-hand side of the equation yields similar results for \(Z_t\).

The results are not reported due to space considerations.

The estimation results based on log prices yield similar qualitative results and can be obtained from the authors upon request.

Adrangi B, Chatrath A, David RC (2000) Price discovery in strategically-linked markets: the case of the gold–silver spread. Appl Financ Econ 10(3):227–234CrossRef

Balke NS, Fomby TB (1997) Threshold cointegration. Int Econ Rev 38:627–645CrossRef

Batten JA, Ciner C, Lucey B, Szilagyi P (2012) The structure of gold and silver spread returns, forthcoming, Quant Financ

Baur DG, Lucey BM (2010) Is gold a Hedge or a Safe Haven? An analysis of stocks, bonds and gold. Financ Rev 45(2):217–229CrossRef

Baur DG, McDermott TK (2010) Is gold a safe haven? International evidence. J Bank Financ 34(8):1886–1898CrossRef

BIS (2009) The international financial crisis: timeline, impact and policy responses in Asia and the Pacific. Bank for International Settlements August 2009

Ciner C (2001) On the long-run relationship between gold and silver: a note. Global Financ J 12:299–303CrossRef

Engle RF, Yoo BS (1991) Cointegrated economic time series: an overall with new results, Chapter 12. In: Engle RF, Granger CWJ (eds) Long-run economic relationships. Oxford University Press, Oxford, pp 237–266

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Escribano A, Granger CW (1998) Investigating the relationship between gold and silver prices. J Forecast 17:81–107CrossRef

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Liu SM, Chou CH (2003) Parities and spread trading in gold and silver markets: a fractional co-integration analysis. Appl Financ Econ 13(12):899–911CrossRef

Lucey BM, Tully E (2003) The evolving relationship between gold and silver 1978–2003: evidence from dynamic cointegration analysis, IIIS discussion paper, Trinity College, Dublin

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Title: The long-run relationship of gold and silver and the influence of bubbles and financial crises
Authors: Dirk G. Baur
Duy T. Tran
Publication date: 01-12-2014
Publisher: Springer Berlin Heidelberg
Published in: Empirical Economics / Issue 4/2014
Print ISSN: 0377-7332
Electronic ISSN: 1435-8921
DOI: https://doi.org/10.1007/s00181-013-0787-1

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