The price of gold in different countries
Economists assume that the price of gold, although uncertain, is estimable. They approach the estimate like any other product with increasing production costs.
Gold specialists and traders, by contrast, follow an older economic convention that emphasizes the monetary roles of existing gold stocks, which exceed annual production of new metals by two orders of magnitude. It is believed that the price of gold is largely based on expectations of changes in international macroeconomic variables and world trade.
Neither of these approaches has produced 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. Therefore, if we say that manufactured claims should increase proportionally with world gross national product (GNP), with Leontief et al., we get forecasts of world annual gold consumption in the year 2000 that are ridiculously high. namely, two to three times the 1980 outputs. If we were to provide such increases from new gold production, increases in real gold prices to $600 or $1,000 per ounce in constant dollar terms would be required.
Clearly, these estimates are inconsistent with past patterns of change in supply and demand for manufactured gold, which provide evidence of considerable sensitivity to price changes (price elasticity). This suggests market pundits to re-examine gold’s role as the primary 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 are largely responsive to changes in asset prices, that is, 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 not been more successful than the commodity approach.
One reason 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 as the share price of foreign assets in the portfolios of international currency risk-averse investors. The price of gold itself, the exchange rate, the price level and the interest rate are shown as substitute 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 monetary policy constraints and balance of payments disequilibrium. As investors seek to maintain desired holding levels of different assets, foreign and domestic, markets for gold producing bullion or stocks respond according to conditional expectations of key rate changes and uncertainties affecting value. of the currency of the country of origin. The challenge of this hypothesis is to find a way to test it empirically.
Mining stock exchanges provide a way around the difficulty. Since gold mining companies’ bullion and stocks are gross substitutes, the use of capital asset pricing theory allows us a simple test of this alternative model as applied to South American gold producers. Norte whose shares are listed on the stock market.
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 demonstrated by the size of the premium that prevails 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 equity 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 stocks in their investment portfolios.