Analysis of the Relationship between Oil, Gold and Inflation: A case study of Pakistan

The dynamic and complex affiliation among price of Gold, Oil and inflation has attracted to the market practitioner and policy makers, from the last few decades. In order to gain the profit, investors consider as a secure form of investment against the unforeseen disasters. This study investigates the relationship between prices of gold, oil and inflation. We use secondary data of gold prices, oil prices and inflation covering the period from August, 2004 to January, 2017 of Pakistan. In order to examine the impact of oil prices and gold prices on inflation we use Vector Error Correction model. It is found that there is long term relation between the oil, gold and inflation via cointegration process. Moreover, empirical analysis shows that fitted VEC model is adequate based on portmanteau autocorrelation and Lagrange Multiplier test. Forecast of gold prices, oil prices and inflation for the next 12 months are computed through VEC model, FMAE is minimum as compared to FRMSE.