The Relationship of the Value of the Dollar, and the Prices of Gold and Oil: A Tale of Asset Risk

This paper investigates the relationship between the value of the dollar and the prices of two commodities, gold and oil. Granger causality is used on monthly data from January of 1970 through July of 2008. The empirical results show that the hypothesis that there is no causal relation between the value of the dollar and the prices of gold and oil is not supported by the evidence. There are causal relations between each of the prices, and there is a negative relation between the value of the dollar and the price of each of the commodities, as predicted by standard economic theory. Also consistent with the predictions of classical economic theory is that there is a positive statistical association between the prices of gold and oil. The implication is that gold and oil represent safe havens from fluctuations in the value of the dollar.