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