Study of gold prices - empirical evidence

Abstract

The objective of this project was to examine the factors which

influence the price of gold, and to develop a gold pricing model that

could forecast the gold price. With a simple-to-use gold pricing model,

the average investor would be able to make use of it to forecast the

gold price and subsequently arbitrage in the gold futures market.

A literature review was carried out for this study, which suggested

that demand and supply of gold, exchange rate, interest rate, and

political stability were some of the factors that influence the gold

price.

Monthly data for the factors that were deemed suitable for our

empirical study were collected for the period from April 1986 to

February 1991 and were then fed into the Time Series Processor (TSP)

programme. The multiple regression analysis carried out obtained an

equation which explained significantly the relationship of factors like

the price of crude oil, exchange rate, interest rate, money supply, and

the stock market index to the price of gold.

Even though the gold pricing model developed could successfully

forecast the price of gold, accounting for 80 percent of the variation

in the gold price, the model however has its limitations. Therefore, it

is essential that the investor exercises caution when using the gold

pricing model, and relies on his own judgement before deciding to

arbitrage in the gold futures market.