A theoretical fundamental model of USD/CAD, gold spot and gold futures with interest rates, growth and financialisation
A theoretical fundamental model of USD/CAD, gold spot and gold futures with interest rates, growth and financialisation

Summary/Abstract: 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.

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