The Monetary And Output Factors In Gold Pricing

Because of the U.S. sub-prime crisis broke out, a world-wide financial crisis rapidly and heavily punched the global financial markets. Although governments continued to release huge fiscal policy and increase the money supply, the capital flows of all kinds of commodities markets and the prices of financial assets keep declining. As the crisis continued to strengthen, major Western economies’ shocking negative growth gave the investors’confidence a heavy blow.As the special double-property of gold, gold becomes the first choice of asset to hedge the inflation. However, the price of gold in this process has faced unexpected twists and turns, people are confused about the future gold market trend. Most domestic gold price research literatures are qualitative analysis. But the empirical literatures from the perspective of economic theory on the gold supply and demand factors are few.This paper will use the log-linear approximation method to establish the gold pricing model, and gradually improve the model by adding the major factors which affect the gold price. It will answer whether gold is still a hedging against the inflation. And how do the changes of international money supply and international output affect the gold price.First of all, the money supply has a positive correlation with the gold price, and between the output and the gold price, there is an inverse relation. But gold price is more sensitive to the changes in output. We can use the "money illusion" theory to explain the different sensitive of gold to money supply and output. "Money illusion" says that people are always blinded by the increasing nominal income. Because the increasing money supply will push up both the price level and nominal income, people will not take an active hedging.Secondly, the empirical work shows that China in the international gold market plays the role of price taker. The impacts of RMB appreciation and depreciation are very limited. The dollar plays an important role in gold pricing. The dollar’s appreciation and depreciation bring an inverse effect on gold pricing.Third, because of sterling and euro exchange rate fluctuations have a negative correlation with dollar, the assets in sterling and euro become the hedges of dollar depreciation. When dollar confronts a depreciation, the international capital will convert into sterling and euro assets. It will lead to an appreciation of sterling and euro, and parts of capital will entre the gold market to push up the price.Finally, gold investment is still a powerful hedging of inflation. Empirical work shows that the changes of consumer price index lead a obvious change in gold price. Each one percentage point rising in CPI will cause the gold price rise by 3.53%, so investors should focus on the price level changes.According to empirical results, we should continuously improve the yuan’s international influence; increase the amount of central bank gold reserves; choose right time to take market operations; encourage the public gold reserves; develop the China’s gold market and increase China’s gold pricing power in international gold market; suggest that China’s large state-owned banks should play as market makers in the gold market.Because of the different statistical methods, although we use the logarithmic differential treatment, the accuracy of the model is still affected by the money supply and output data. And because output, money supply and exchange rates are affected by each other, it is difficult to measure the absolute specific effects on gold price.