The price of gold in different countries

Economists assume that the price of gold, although uncertain, is estimable. They come close to estimating like any other product with rising production costs.

Gold specialists and traders, by contrast, follow an older economic convention that emphasizes the monetary roles of existing gold stocks, which exceed the annual production of new metals by two orders of magnitude. The price of gold is believed to be largely based on expectations of changes in international macroeconomic variables and world trade.

Neither of these approaches has yielded good price predictions. The basic problem is that investment demands cannot be treated simply as changes in producers’ inventories for speculative or precautionary purposes. as with other merchandise. Thus, if we assert that manufactured demands should increase proportionally with world gross national product (GNP), with Leontief et al., we get forecasts of annual world gold consumption in the year 2000 that are ridiculously high. namely, two or three times the outputs of 1980. If we were to provide such increases in new gold production, it would require increases in real gold prices to $600 or $1,000 per ounce in constant dollar terms.

Clearly, these estimates are inconsistent with past patterns of change in supply and demand for manufactured gold, giving evidence of considerable sensitivity to changes in price (price elasticity). This prompts market pundits to re-examine gold’s role as a major store of value whose price responds less to movements in manufactured products and new gold production costs than to changes in previously mined gold stocks. Such asset holdings respond largely to changes in asset prices, ie interest rates, inflation and the exchange rate. Because prices are influenced by changes in macroeconomic variables, this second approach attempts to correlate gold prices directly with monetary variables, but has been no more successful than the commodity approach.

One of the reasons for the failure is that changes in gold stocks complicate international capital movements. Capital movements are driven by expectations of changes in asset prices, and these are sensitive to uncertainty about monetary policies. These complications discourage and confuse attempts to use statistical analysis directly to explain gold price movements.

We suggest treating gold like the share price of foreign assets in the portfolios of international investors averse to currency risks. The gold price itself, the exchange rate, the price level, and the interest rate are shown as proxy asset prices that enter with other exogenous variables and wealth in the demands of private and public investors here and abroad. These investors maximize utility subject to the constraints of monetary policy and balance of payments disequilibrium. As investors seek to maintain desired holding levels of different assets, foreign and domestic, markets for bullion or gold producing stocks respond according to conditional expectations of changes in key rates and uncertainties affecting value. of the currency of the country of origin. The challenge with this hypothesis is to find a way to test it empirically.

Mining stock exchanges provide a way around the difficulty. Since bullion and shares of gold mining companies are gross substitutes, the use of capital asset pricing theory allows us a simple test of this alternative model as applied to North American gold producers. North whose shares are listed on the stock exchange.

Our results show that trends in new gold production and price movements are not simple functions of commodity forecasts using conventional gold market analysis. Gold is best forecast as a stock price determined by the stock market. This implies a much more volatile market whenever monetary expectations become dominant. This is shown by the size of the prevailing premium for gold above its period production price. This can be two to three times higher than normal, enough to significantly discourage the growth of manufactured ones. Above this premium level, irregular price cycles arise from movements in stock positions among investors during periods of adjustment to the global monetary imbalance. The variation in the price is related to the sensitivity of the invented demands to the price. We show that investors who monitor macroeconomic variables in a fully identified model can successfully hedge against currency devaluations and player capital gains periodically through a strategy that includes gold securities in their investment portfolios.

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