Persistence in the returns and volatility of gold prices expressed in different currencies: true or spurious long memory

Abstract

Many observers have long noted a positive relation between the Dollar price of gold and weakness in the Dollar. Beckers and Soenen (1984) verify the gold/Dollar inverse relation empirically and draw a strikingly asymmetric implication for US and non-US investors. Roll and Pukthuanthong (2011) find that there is nothing special about the relation between the dollar and gold. The same phenomenon occurs for the Euro, the Yen, and the Pound but with some occasional departures. This paper provides an empirical investigation of the long memory in the returns and volatility of gold prices expressed in four different currencies (USA dollar, Euro, Yen and Pound). Employing different long memory tests and estimators, a weak long memory is demonstrated in the return series, but a strong evidence is provided in the volatility measures. Our findings indicate that a short-memory model with level shifts is a viable alternative to a long memory model for the gold returns, while a long memory in volatility is real and not caused by shifts in variance. Thus, our results should be useful to market participants in the gold markets, whose success depends on the ability to forecast gold price movements, even when expressed in different currencies.