Dynamic transmission effects between the interest rate, the US dollar, and gold and crude oil prices

This paper shows that in the short term both gold and crude oil prices positively influence each other. Interest rates have a negative influence on the future gold prices and a positive influence on the future crude oil prices. In the long run, a relationship exists whereby interest rates influence the US dollar, which in turn influences international crude oil prices. When the Federal Reserve Board (Fed) lowers interest rates to boost the economy, market expectations for oil demand change and, as a result, crude oil prices fluctuate. In addition, there is a price transmission relationship from interest rates to gold prices. A reduction in interest rates influences investor expectations with respect to depreciation of the dollar. Investors then move their capital to the gold market for capital preservation or speculation. Finally, international gold and crude oil prices have feedback effects on interest rates. This paper infers that crude oil prices increasing to a certain level trigger inflation, at which juncture the Fed may tighten monetary policies to downturn the bloom economy.

► In the short term both gold and crude oil prices positively influence each other. ► International gold and crude oil prices have feedback effects on interest rates. ► There is a price transmission relationship from interest rates to gold prices. ► Interest rates have a positive influence on the future crude oil prices.