Download Gold, Black Gold, Steel, and World Inflation: A SAS Study

GOLD, BLACK GOLD, STEEL and WORLD INFLATION: A SAS® STUDY
Kamal Shoukry, Loyola Marymmmt University, Los Angeles
The variable year is used to indicate the dates.
It has not been used as an independent variable
in order to avoid masking the influence of the
important economic variables.The independent
variables: gold price per ounce (gldp), dollar
price of oil or black gold per barrel (blgp), scrap
steel price per ton (stlp), US unemployment rate
(usur), US real GDP in 1996 fixed dollars (rgdp),
annual % change in rgdp ( dgdp), British
consumer price index (bcpi), U.K. exchange
rate index (bxri), and the Sterling or the Great
Britain Pound GBP exchange rate (ukxr), all in
31 observations.
Abstract
The pUIJlOSe of this study is to estimate the
comparative influences of some causes of
inflation using PROC's STEPWISE, REG,
CORR, and ARIMA. Reasons for recent unusual
gold price relative stability, US$ strength and
GBP stability are also considered.
The Stagflation of the Seventies
The petroleum oil (black gold) embargo of the
1973 has increased energy costs and led
to a stagflation which is a combination of
inflation and stagnation (recession). In theory
this is known as an external supply shock
causing aggregate supply to shift inward and
up thus leading to cost push inflation and
unemployment. A policy of economic expansion
was followed to cure recession has caused
another type of inflation known as demand pull
inflation. Coal miners during that period went
on a strike requesting a 30% wage increase and
got what they wanted Wage increases are
another source or cause of cost push inflation,
coal enters in the production of steel. Like oil
energy, steel is a key commodity whose price if
increased would cause a general inflation of all
products in the economy. Factory and farm
machinery, vehicles and a vast number of
products are made out of steel. Almost overnight
cars and machinery prices soared high. Strong
inflationary pressures added to nominal interest,
that is , the cost of borrowing, further worsening
cost push and discouraging spending and thus
recession. The unemployment rate reached 8.5
%in 1975.
Some Important Correlation Coefficients
Gold and oil77.7 %, gold and acpi 60%, gold
and bcpi 52 %, gold and bxri -53 %. Oil and
usur 43 %, oil and bcpi 32 %, oil and ukur 49
%, oil and ukxr- 48 %. Steel and acpi 70 %,
steel and rgdp 81 %, steel and bcpi 80 %; acpi
and rgdp 96 %, acpi and bcpi 99 %; bcpi and
rgdp 98 %, acpi and bxri -75 % ; bxri and rgdp
-66 %; bxri and bcpi - 70 % because inflation
erodes the value or purchasing power of the
currency.
The Regression Model
With acpi as the dependent and except the year
all other variables in the model are independent .
The modei gave the following quantities. RSquare 99.65 %, Adj R-Sq 99.48 %, F Value
575.66, CV 3.0, Root MSE 3.13688, Pr > F: <
.0001, Durbin Watson D 1.551, and 1st Order
Autocorrelation 0.211 .
Stepwise Regression
Five independent variables were selected as
significant at the 0.1500 level. Those are :
bcpi, gldp, bxri, ukxr, and blgp, with an F-value
of 1645 .43, and aPr >F of<.OOOl. Model RSquare is 99.55%. The selection of three
British variables indicates the very strong
relationships between the British and American
economies. This also justifies the selection of the
British Economy in this study to represent
Europe as the rest of the world (ROW) from the
US viewpoint. In fact the British economy can
be considered the strongest economy in Europe
and its currency was recently the most stable.
The recent victory of the Labor Party over the
Conservative has been mainly attributed to
the strength of the economy rather than the
political disagreements among some members
of the conservative party.
Does History Repeat Itself
At the beginning of 1999 the price per barrel of
oil was almost $10. By the end of the same
year that price has more than tripled reaching
$32. Similar effects though not necessarily exact were expected to occur. Symptoms seemed to
support such conclusion. The Fed raised interest
in 2000 to combat inflation then lowered it five
times during five months to counteract recession.
A model of twelve variables is used here to
examine the data obtained.
Variables and Symbols
The dependent variable is the American
consumer price index (acpi) tracing the price
level and implying the inflation rate.
564
rates , which can actually bring about higher
future rates.
Stoek Marke t Evidence
The stock markets now operate within a high
degree of uncertainty because the econom y
seems hesitan t betwee n expansi on and
contraction. Investo rs' behavio r is influenced by
the announ cement effects. Any news about a
modest increase in a corpora tion's profits
create optimis m and vice versa . During the week
of the Memor ial Day, a slight fall in unempl oyed
made the Dow climb above the 11000 level. The
following week after the end of the Memorial
Day when the number of the unempl oyed
requesting compen sation increased the Dow
plunged down below the 11,000 level. Clearly,
!hese are signs of a slowing down economy, and
m fact the unempl oyment rate has actually
increas ed from 4.2 % in 1999 to 4.4 % in 2000 to
4.5 in 2001.
Arima Forecasts
The following are forecasts ofUS consum er
price index (acpi) and unempl oyment rates
(usur) for twelve years beyond the year 2000.
year
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Quantitative Effects eomparisons
In the 1970's the oil embarg o started in 1973.
The price per barrel of oil rose from $ 3.6 in
1972 to$ 10.4 in 1974. Gold price rose from$
58.2 in 1972. $ 97.3 in 1973 to$ 159.3 in 1974.
Steel price was$ 35.3 in 1972 then rose to
$159.3 in 1974. The price level index rose from
41.8 in 1972 to 49.3 in 1974. The unemployment
rate rose from 4.9 in 1973 to 8.5 in 1975. We
here note the increase in both inflation and
unempl oyment rates known as Stagflation. Real
GDP which has increased in 1972 by 6.6%
droppe d by- 1.3 % in 1974 . British price index
(bcpi) rose from 54.7 in 1973 to to 63.7 in
1975, while the unempl oyment rate rose from
5.8 to 10.1 for the same period. Lookin g at
recent develop ments it is quite well known that
fast econom ic growth leads to inflation and that
inflation paves the way to a recession. How then
can we tell the. difference betwee n this case and
the stagflat ion case ? In the fast growth case
'
things happen gradual ly over time but in a
shock
stagflat ion due to an aggregate supply
things happen sudden ly . There are remote
effects in the first case and immedi ate impacts in
the second case. In early 2000 the Fed raised
interest twice to tame some sudden inflationary
pressur es and stood ready to raise interest for the
third time since the announ cement by the
Departm ent of Labor that the consum er price
index rose by .7 of 1 % during the month of
March which is equival ent to an annual inflation
rate of 8.4 % . This price index does not include
two of the most inflated items namely food and
energy . Possibl y the reason for that exclusion is
to avoid expectations of higher future inflation
acpi
176.30
180.61
184.37
188.63
192.39
196.65
200.41
204.67
208.42
212.68
216.44
220.70
usur
4.51
4.68
4.53
4.53
4.40
4.51
4.45
4.55
4.44
4.51
4.41
4.50
Conclusions
The strength of the Americ an econom y become s
evident when the value of its currenc y is
compared to the currenc y of the second largest
which is the Japanese econom y. The US$ was
equivalent to 145 Yen in 1985. The Asian Crisis
brough t this value down to 100 or 99 Yen in the
year 2000. After a year of relative stability its
value continu ed to climb 124 then slightly down
to 122 during 2001 and this is where it is now in
mid June 2001 GBP. After wide fluctuations
during 1982 and 1994 , that is down from 100%
of its value to 75% in 1985 then up to its full
value betwee n 1988 and 1993 then down to
relative stability fluctuating within narrow limits
betwee n 85 % and 95 % . This relative stability
is due to a stronge r British econom y during the
first term of the Labor Party. The British did not
elect to join The Euro group probab ly to have
some time to find out how the Euro is going to
do without Britain. The Euro started to circulate
at $ 1.18 last year and its value continu ed to
decline till now to become equival ent to $ 0.85 .
The relative stability of the British currenc y
implies a stronge r econom y than that of the
Europe an contine nt in terms of faster growth ,
lower inflation and unempl oyment rates. The
Labor Party leader has announ ced that Britain
may soon join the Euro after a Nationa l Survey.
This may strength en the Euro' s international
value but this may require some upward
adjustments in British prices in terms of the
Euro. The 1999 unempl oyment rates for the US
4.2 % and for Britain 6.1 % , were the lowest
565
for each since 1970 , 4.9 and 6.5 respectively.
The 99 % correlation coefficient between the
US and British consmner price indices seems
Amazing. It implies that both countries are
strong trade partners. Since 1993 till2000 the
Dollar value of the British pound fluctuated
between $ 1.7 and$ 1.5 , a much greater recent
Stability. Today in mid June 2001 it isS 1.37;
it was$ 2.47 in 1970 which implies that the
American economy has gained more strength
relative to the British economy in terms of
growth rates. The US average annual inflation
rate during the 1970-2000 period is 5.095 %
which is smaller than the British rate of 5.395 %.
The British economy was inflating little faster
leading to a gradual deterioration of the British
currency relative to the American currency.
Gold is an obvious indicator of inflation. Gold
discoveries and the inflow of foreign gold may
cause inflation after a year or two if not sterilized
if its rate of increase exceeds the rate of increase
of the production of goods. Black gold and steel
price increases increase production costs leading
to higher prices and inflation through cost push.
Gold is also used for hedging against inflation.
Monetary assets decrease in value during
inflation. Gold prices usually increase faster than
the prices of other goods. Holding gold as an
asset instead of paper money help maintain or
increase the real value of total assets. In 1979
inflation caused gold price to exceed $ 670 ,
then went down to fluctuate around the $ 400
level from 1982 to 1990 then to less than $ 300.
Now in 2001 it fluctuates between$ 260-270.
Gold is no longer essential as a reserve to
monetary authorities as it was before. Britain
sold gold in return for Dollars Yens and Marks
The US is a net exporter of gold to the rest of
the world. Gold prices are now much more
stable than before. Finally, the ARIMA forecasts
obtained assume the absence of economic policy
which is applied whenever inflation and
unemployment rates exceed the desirable limits.
The forecast rates obtained here seem to be
reasonable in the absence of supply shocks and
their continuous increases in the price level.
And for not forgetting the stock markets, the
current appetite of stock markets speculators
would make them optimistic and create a rally
in the stock market with any sign of
improvement in the economic performance.
Hedging also is done by buying stocks
provided that the rate of ii1,crease of the stock
price exceeds the inflation rate.
Contact Information
The author may be contacted at:
Kamal Shoukry
Department of Economics
Loyola Marymount University
One LMU Drive, Suite 4217
Los Angeles, CA 90045-2659
Phone: (310) 338-2815
Fax: (310) 338-1950
e-mail: [email protected]
References
Gujarati, Damodar , Basic Econometrics,
Third Edition, New York: McGraw-Hill, Inc.,
1995
SAS Institute Inc., SASIETS User's Guide.
Version 6. Second Edition, Cary, NC:SAS
Institute Inc., 1993.
SAS Institute Inc., SASIETS Software:
Applications Guides 1 and 2, Version 6, First
Edition, 1993.
SAS Institute Inc., SAS/STAT User's Guide,
Vols.Iandll, 1990Version6, Fourth
Edition.
Cary, N.C.: SAS Institute Inc.
SAS Institute Inc., SAS System for Forecasting
Time Series, 1986 Edition.
566