Gold and Exchange Rate: Causality and PredictabilityGold and Exchange Rate: Causality and Predictability

Gold prices have shown a remarkable increase along with the weakening of Pakistani rupee (PKR) over the past several years. This study investigates gold-exchange rate association in context of Pakistan. It is focused on the interrelationships of exchange rate and gold in terms of causality and predictive ability. Time series daily data for the period 1992-2015 on four foreign currencies against the PKR are being used. Applying augmented vector auto regression (VAR) and dynamic model, the study finds that the causality runs from exchange rate to gold. Moreover, exchange rate possesses the predictive ability for the gold and the predictive ability is robust across short horizons for out of sample forecasting. The findings of this study will benefit investors, policy makers and academicians. Keywords: Exchange rate; Gold; Pakistan. JEL Code: F3, F31, G1, G10, G15, G32