GoldTruckers monitors the price of precious metals and has daily data on prices

Question

GoldTruckers monitors the price of precious metals and has daily data on prices and sales of gold for the past several years. One of their new MBA financial wizards has estimated the following relationship for gold sales in the past year of trading (250 observations):
Q= 4000 - .01P + 1.5 i - 1.25 X + 2.0S R2=.96
(857) (.002) (.65) (.44) (.48)
Where Q is daily sales of gold in troy ounces, P is the price of gold in dollars per troy ounce, i is the most recent one month report on US inflation (in percent), X is and index of the exchange rate of US dollar compared to seven other currencies, and S is the market price of an ounce of silver in dollars. Standard errors are in parentheses.
a.) Evaluate the results of this regression.
b.) Recently the price of gold has been $380 per ounce, inflation was measured at .2% for the month, the dollar has been trading at an index value of 99.7 on the foreign exchange market, and silver has been steady at $4.75 per ounce. What is the expected quantity of gold that will trade on a daily basis?
c.) Are gold and silver substitutes or compliments? Explain.

Explanation / Answer

a) Given the high R2 (the closer to 1.0 the better), and the fact that all the coefficients are at least 2x their standard errors (indicates the coefficient is significantly different from 0 at the 95% level of confidence), the results would appear to be a good fit. b) Here we have Q= 4,000-.01(380) +1.5(0.2) -1.25(99.7) +2.0(4.75)= 3881.375 c) Since silver has a positive coefficient, meaning the demand for gold goes up with an increase in the price of silver, the two commodities are substitutes.

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