W9_Candra Nugraha_Control Chart for Oil and Gold Price


Opportunity Statements

It is interesting to read Adi’s posting on Oil versus Gold which is relatively stable in terms of barrel oil per ounce Gold. Were gold prices driven by oil prices, or were the two commodity prices driven up by other forces acting on each with similar effect? This brings up the important question of causation.

I want to know whether for the last 11 years oil and gold price is within control and has strong relationship.

Root Cause

  • Computing the average Barrel Oil per Ounce Gold over the last 11 years will give me a feel for the oil and gold price correlation.
  • To obtain a measure of the variability in Barrel Oil per Ounce Gold , I can calculate the variance.

Develop Alternatives

Below is the IPO Diagram

Development of the outcomes

The first step in generating a control chart is to construct a run chart as per  graph below:

Mean 12.01
Std Deviation 2.43
3STD UCL 19.3
LCL 4.73
2STD UCL 16.88
LCL 7.16
1STD UCL 14.45
LCL 9.59

Minimum Acceptable requirements

The common technique which is a simple way to get visual feel for the way data is distributed is to draw a histogram which display how frequently a given outcome occurs:

Analyze and compare the alternatives

Based on the histogram above, it would appear to be symmetric and bell shaped which is about a normal curve. Now, I am using the empirical rule to develop and interpret the control chart. Most of control charts establish the upper and lower control limit +/- 3 standard deviations from the center line. So the result is:

  • Lower Control Limit = 12.01 – (3*2.43) = 4.73
  • Upper Control Limit = 12.01 + (3*2.43) =19.3

The empirical rule states that approximately 3s = 99.73% of all the data for this Bbl/Oz gold should fall within these limits.

Develop preferred alternative

The graph below is showing that the Bbl/Oz gold price is in control for the last 11 years (2000 – 2011).

The data on oil and gold price is in average for those years. It might be some outliers if the data is shown in hourly, daily or even monthly. Price correlation is just one of many tools investors must deploy in making informed decisions. There are no absolute certainties in markets, just degrees of certainty.

Monitor and Evaluation (Post Mortem)

Evaluate and monitor the Bbl/Oz gold price in between 4.73 – 19.3 Bbl / Oz Gold as it can be used as:

  • Basis of future cost estimation.
  • Investment decision to anticipate the uncertainties of currency

References:

  1. Nugroho,Adi ,Oil-vs-Gold. Retrieved from Web site:
    https://aacesubajou.wordpress.com/2011/05/20/w10_adi-nugroho_oil-vs-gold/
  2. Kiemele, Mark J., Schmidt, Stephen R. & Berdine, Ronald J. (2000), Basic Statistic, Tools for Continuous Improvement 4thEdition, Colorado: Air Academy Press, LLC.
  3. Sullivan, William G., Wicks, Elin M. & Koelling, C. Patrick (1942), Engineering Economy 15th Edition, Singapore: Prentice Hall, Inc.
  4. Brassard, Michael & Ritter, Diane (2010), The Memory Jogger 2nd  edition, Tools for Continuous Improvement and effective planning, Canada:GOAL/QPC.
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About Candra Nugraha

I'am living in jakarta, indonesia
This entry was posted in Candra Nugraha, Week #9, Weekly Submission. Bookmark the permalink.

One Response to W9_Candra Nugraha_Control Chart for Oil and Gold Price

  1. DrPDG says:

    Very nicely done, Candra!! Interesting to map the DIRECTIONS in the price of gold vs the price of oil………. Which one lags and which one follows……?

    Another question is whether either or both gold and oil are in speculative bubbles right now. Just last week the President of Exxon Mobil stated that based on historic supply and demand, gold should be at $60 -$70. And I think gold is being driven by the fear of INFLATION, as the EU and US in particular continue to print money at an unprecedented rate.

    But anyway, you are on track to using the price of gold to project or predict the costs of your projects into the future. Why? First gold is relatively stable as we saw from from last week’s exercise. Secondly, it clearly reflects inflationary trends, which was also clear from last week’s solution.

    So now the only thing we have to do is convert whatever it is we are ESTIMATING to ounces of gold equivalent, and using the historic curves for gold since 1970 or 1980, it provides a very handy and reasonably reliable way of predicting costs into the future.

    Then if you want to take it one step further, you can use PW (NPV) to bring those costs back to today’s dollars and see if the project is still feasible. (Note- as long as the ratio of ounces to gold to barrels of oil remains constant, it should NOT impact the feasibility, but if those two start to diverge for whatever reason, it may very well have an impact.

    Anyway, very nice job and I hope you can mentor David and Ibu Lilly, as they seem to be struggling badly with this very fundamental concept……

    Keep up the good work!!

    BR.
    Dr. PDG, Jakarta

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