A theoretical fundamental model of USD/CAD, gold spot and gold futures with interest rates, growth and financialisation
DOI:
https://doi.org/10.18559/ref.2026.1.4074Keywords:
exchange rate, gold, commodity futures, financialization, real interest rates, cost of carry, USD/CADAbstract
We develop a three-equation structural model linking the USD/CAD exchange rate, the spot price of gold and gold futures prices. The framework explicitly incorporates real interest rates and financialisation indices for both the United States and Canada, while output gaps influence the exchange rate indirectly through channels including monetary policy expectations, risk appetite and commodity demand. The model accounts for the commodity-currency nature of the Canadian dollar, the opportunity cost of holding gold, and the carry-arbitrage relationship augmented by speculative demand. We derive the model’s reduced-form properties and discuss its key theoretical predictions as well as cross-equation feedback mechanisms. Preliminary empirical validation based on cointegration analysis and structural vector autoregression (SVAR) estimation confirms the model’s principal theoretical predictions. The analysis highlights the amplification effects arising from the mutual feedback between the exchange rate and gold prices.
JEL Classification
Foreign Exchange (F31)
Contingent Pricing • Futures Pricing (G13)
International Financial Markets (G15)
Commodity Markets (Q02)
Downloads
References
Amano, R. A., & van Norden, S. (1995). Terms of trade and real exchange rates: The Canadian evidence. Journal of International Money and Finance, 14(1), 83–104. https://doi. org/10.1016/0261-5606(94)00016-T
View in Google Scholar
DOI: https://doi.org/10.1016/0261-5606(94)00016-T
Basak, S., & Pavlova, A. (2016). A model of financialization of commodities. The Journal of Finance, 71(4), 1511–1556. https://doi.org/10.1111/jofi.12408
View in Google Scholar
DOI: https://doi.org/10.1111/jofi.12408
Baur, D. G., & Lucey, B. M. (2010). Is gold a hedge or a safe haven? An analysis of stocks, bonds and gold. Financial Review, 45(2), 217–229. https://doi.org/10.1111/j.1540-6288.2010.00244.x
View in Google Scholar
DOI: https://doi.org/10.1111/j.1540-6288.2010.00244.x
Baur, D. G., & McDermott, T. K. (2010). Is gold a safe haven? International evidence. Journal of Banking & Finance, 34(8), 1886–1898. https://doi.org/10.1016/j.jbankfin.2009.12.008
View in Google Scholar
DOI: https://doi.org/10.1016/j.jbankfin.2009.12.008
Bhardwaj, G., Gorton, G., & Rouwenhorst, K. G. (2013). Fooling some of the people all of the time: The inefficient performance and persistence of commodity trading advisors. Yale ICF Working Paper No. 08-21. https://ssrn.com/abstract=1279594
View in Google Scholar
Cashin, P., Cespedes, L. F., & Sahay, R. (2002). Keynes, cocoa, and copper: In search of commodity currencies. IMF Working Paper WP/02/223.
View in Google Scholar
DOI: https://doi.org/10.5089/9781451875300.001
Chen, Y.-C., & Rogoff, K. (2003). Commodity currencies and empirical exchange rate puzzles. IMF Working Paper No. 02/27. International Monetary Fund.
View in Google Scholar
Chen, Y.-C., Rogoff, K., & Rossi, B. (2010). Can exchange rates forecast commodity prices? The Quarterly Journal of Economics, 125(3), 1145–1194. https://doi.org/10.1162/qjec.2010.125.3.1145
View in Google Scholar
DOI: https://doi.org/10.1162/qjec.2010.125.3.1145
Cheng, I.-H., & Xiong, W. (2014). Financialization of commodity markets. Annual Review of Financial Economics, 6, 419–441. https://doi.org/10.1146/annurev-financial-110613- 034432
View in Google Scholar
DOI: https://doi.org/10.1146/annurev-financial-110613-034432
Dornbusch, R. (1976). Expectations and exchange rate dynamics. Journal of Political Economy, 84(6), 1161–1176. https://doi.org/10.1086/260506
View in Google Scholar
DOI: https://doi.org/10.1086/260506
Engel, C. (2016). Exchange rates, interest rates, and the risk premium. American Economic Review, 106(2), 436–474. https://doi.org/10.1257/aer.20121365
View in Google Scholar
DOI: https://doi.org/10.1257/aer.20121365
Erb, C. B., & Harvey, C. R. (2013). The golden dilemma. Financial Analysts Journal, 69(4), 10–42.
View in Google Scholar
DOI: https://doi.org/10.2469/faj.v69.n4.1
Erb, C. B., & Harvey, C. R. (2017). The golden constant. The Journal of Investing, 26(1), 94–100.
View in Google Scholar
DOI: https://doi.org/10.3905/joi.2017.26.1.094
Fama, E. F., & French, K. R. (1987). Commodity futures prices: Some evidence on forecast power, premiums, and the theory of storage. Journal of Business, 60(1), 55–73. https://doi.org/10.1086/296385
View in Google Scholar
DOI: https://doi.org/10.1086/296385
Fama, E. F., & French, K. R. (1988). Business cycles and the behavior of metals prices. The Journal of Finance, 43(5), 1075–1093. https://doi.org/10.1111/j.1540-6261.1988.tb03957.x
View in Google Scholar
DOI: https://doi.org/10.1111/j.1540-6261.1988.tb03957.x
Ferraro, D., Rogoff, K., & Rossi, B. (2015). Can oil prices forecast exchange rates? An empirical analysis of the relationship between commodity prices and exchange rates. Journal of International Money and Finance, 54, 116–141. https://doi.org/10.1016/j.jimonfin.2015.03.001
View in Google Scholar
DOI: https://doi.org/10.1016/j.jimonfin.2015.03.001
Frankel, J. A. (1986). Expectations and commodity price dynamics: The overshooting model. American Journal of Agricultural Economics, 68(2), 344–348. https://doi.org/10.2307/1241436
View in Google Scholar
DOI: https://doi.org/10.2307/1241436
Frankel, J. A. (2008). The effect of monetary policy on real commodity prices. In J. Y. Campbell (Ed.), Asset prices and monetary policy (pp. 291–333). University of Chicago Press.
View in Google Scholar
DOI: https://doi.org/10.7208/chicago/9780226092126.003.0008
Gorton, G., & Rouwenhorst, K. G. (2006). Facts and fantasies about commodity futures. Financial Analysts Journal, 62(2), 47–68. https://doi.org/10.2469/faj.v62.n2.4083
View in Google Scholar
DOI: https://doi.org/10.2469/faj.v62.n2.4083
Johansen, S. (1988). Statistical analysis of cointegration vectors. Journal of Economic Dynamics and Control, 12(2–3), 231–254. https://doi.org/10.1016/0165-1889(88)90041-3
View in Google Scholar
DOI: https://doi.org/10.1016/0165-1889(88)90041-3
Lustig, H., Roussanov, N., & Verdelhan, A. (2011). Common risk factors in currency markets. Review of Financial Studies, 24(11), 3731–3777. https://doi.org/10.1093/rfs/hhr068
View in Google Scholar
DOI: https://doi.org/10.1093/rfs/hhr068
Meese, R. A., & Rogoff, K. (1983). Empirical exchange rate models of the seventies: Do they fit out of sample? Journal of International Economics, 14(1–2), 3–24. https://doi.org/10.1016/0022-1996(83)90017-X
View in Google Scholar
DOI: https://doi.org/10.1016/0022-1996(83)90017-X
Pindyck, R. S. (1994). Inventories and the short-run dynamics of commodity prices. RAND Journal of Economics, 25(1), 141–159.
View in Google Scholar
DOI: https://doi.org/10.2307/2555858
Pindyck, R. S. (2001). The dynamics of commodity spot and futures markets: A primer. The Energy Journal, 22(3), 1–29. https://doi.org/10.5547/ISSN0195-6574-EJ-Vol22-No3-1
View in Google Scholar
DOI: https://doi.org/10.5547/ISSN0195-6574-EJ-Vol22-No3-1
Pindyck, R. S., & Rotemberg, J. J. (1990). The excess co-movement of commodity prices. The Economic Journal, 100(403), 1173–1189. https://doi.org/10.2307/2233966
View in Google Scholar
DOI: https://doi.org/10.2307/2233966
Singleton, K. J. (2014). Investor flows and the 2008 boom/bust in oil prices. Management Science, 60(2), 300–318. https://doi.org/10.1287/mnsc.2013.1756
View in Google Scholar
DOI: https://doi.org/10.1287/mnsc.2013.1756
Tang, K., & Xiong, W. (2012). Index investment and the financialization of commodities. Financial Analysts Journal, 68(6), 54–74. https://doi.org/10.2469/faj.v68.n6.5
View in Google Scholar
DOI: https://doi.org/10.2469/faj.v68.n6.5
Uhlig, H. (2005). What are the effects of monetary policy on output? Results from an agnostic identification procedure. Journal of Monetary Economics, 52(2), 381–419. https://doi.org/10.1016/j.jmoneco.2004.05.007
View in Google Scholar
DOI: https://doi.org/10.1016/j.jmoneco.2004.05.007
Downloads
Published
Issue
Section
License
Copyright (c) 2026 Mykola Yaremenko
This work is licensed under a Creative Commons Attribution 4.0 International License.
Editorial Office: Research Papers in Economics and Finance 