Economists believe that the price of gold, although uncertain, but estimated. They approach the valuation of any other commodity with rising production costs.
Specialists and gold traders, by contrast, adhere to the previous economic convention, which emphasizes the monetary role of existing gold reserves, which exceed the annual output of the new metal by two orders of magnitude. It is assumed that the price of gold is mainly based on expectations of changes in international macroeconomic variables and world trade.
None of these approaches gave good price forecasts. The main problem is that investment requirements cannot be seen simply as a modification of manufacturers ’stocks for the purpose of precaution or speculation. as with other goods. Thus, when we argue that fabricated demands should increase in proportion to world gross national product (GNP), and Leontief et al., We obtain forecasts of annual world gold consumption in 2000 that are absurdly high. i.e., two or three times in 1980. If we had to provide such increases from new gold mining, it would require an increase in real gold prices to $ 600 to $ 1,000 an ounce per constant dollar.
Obviously, these estimates do not correspond to the past patterns of changes in supply and demand for gold, which indicate a significant sensitivity to price changes (price elasticity). This suggests that market experts are reconsidering the role of gold as the main store of value, the value of which is less responsive to the movement of output and the cost of mining new gold than to changes in stocks of previously mined gold. Such assets mainly respond to changes in asset prices, i.e. interest rates, inflation and currency. Because prices are affected by changes in macroeconomic variables, this second approach attempts to correlate gold prices directly with monetary variables, but it has not been more successful than commodity.
One reason for the failure is that changes in gold reserves complicate the movement of international capital. The movement of capital is driven by expectations of changes in asset prices, and they are sensitive to uncertainty regarding monetary policy. These complications hinder and embarrass attempts to apply statistical analysis directly to explain gold price movements.
We propose to consider gold as the share price of foreign assets in the portfolios of international investors not exposed to currency risks. Own gold price, exchange rate, price level and interest rate are shown as replacement prices for assets that come with other exogenous variables and wealth in demand by private and public investors here and abroad. These investors maximize utility provided by the imbalance of monetary policy and balance of payments. As investors seek to maintain the desired level of various assets, foreign and domestic, gold bullion or stock markets respond in line with conditional expectations of changes in key rates and uncertainties affecting the value of the home country’s currency. The task of this hypothesis is to find a way to test it empirically.
A way around the complexity is given by stock exchanges. Because gold bullion bullion and stock are serious substitutes, the use of capital and asset pricing theory allows us to test this alternative model against North American gold producers whose shares are traded on the stock exchange.
Our results show that trends in new gold mining and price movements are not simple functions of commodity forecasts in a conventional gold market analysis. Gold is best predicted as a stock price determined by the stock exchange. This implies a much more volatile market when monetary expectations become dominant. Such periods are demonstrated by the size of the premium, which prevails over gold above its production price. This can be two to three times higher than usual, enough to significantly hinder the growth of the product. Around this level of premiums, irregular price cycles arise as a result of the movement of stock positions among investors during periods of adjustment to global currency imbalances. The variance in price is due to the sensitivity of the fabricated price requirements. We show that investors who monitor macroeconomic variables in a fully identified model can successfully thwart currency devaluations and capital gains for gamers periodically by using a strategy that includes gold securities in their investment portfolios.