WHO UPHOLDS THE SURGING GOLD PRICE? ROLE OF THE CENTRAL BANK WORLDWIDE - Ku-Hsieh (Michael) Chen

WHO UPHOLDS THE SURGING GOLD PRICE?
ROLE OF THE CENTRAL BANK WORLDWIDE

          Ku-Hsieh (Michael) Chen
             Associate Professor
      Department of Applied Economics,
            Fo Guang University
                  Taiwan

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INTRODUCTION
• The role of gold for human society:
   • Conventional: vested usability (electronics, medical, accessories,
     medium of exchange, value storage, monetary reserve).
   • Contemporary: speculation.

• Market participants keep a close watch upon Gold Price.
   • Individuals, Corporations, Monetary authorities.
   • What are the determinants for gold price fluctuation?
   • Hedge & value maintenance (economic or financial risk;
     inflation; exchange rate depreciation)

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INTRODUCTION
• Trend of gold price within recent 3 decades & 3 counterfactualities.

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INTRODUCTION
• 3 strands for the past studies focusing on gold price:
    • Adopting econometric techniques, and utilizing time series
      data to construct prediction models.
    • Putting focus on the market factors aspect and explaining
      gold price fluctuation by using the supply and demand
      factors of gold market.
    • Emphasizing the macroeconomic and political aspects and
      typically collecting variables to describe economic situation
      or development and then used the variables to estimate the
      impacts on gold market.

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INTRODUCTION
• The topic is still worth to further investigate
    • Historical data might not reflect the impact of the affecting
      factors completely.
    • Market factors model exists worries about information on
      historical data and exogenous environmental factors.
    • Causalities among the factors might be plenty and fairly
      complicated, while a systematical coordination for the
      affecting factors is still a lack.
    • Ignore role of the supreme monetary authority:
        • Information effect.
        • Huge position participant.

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INTRODUCTION
• The novelties of this study:
   • Provide a complete reviews for the past studies concerning
     about the determinants of gold price.
   • Empirically identify the contemporary role played by the
     central banks worldwide on the gold market.
   • Search out the lower bound of the official gold reserve
     holdings for further mining a possibly useful price
     prediction practice.

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THE ROLE OF OFFICIAL GOLD RESERVES
• Historical evolvement:
   • Pre1944:
       • Center of domestic monetary system of UK.
       • Center of international monetary system of the world.
       • Came off the functions by World War I & II.
   • 1944-1971:
       • Returned to the center of international monetary system.
       • US declare to end the conversion between gold and dollar.
   • Post-1971:
       • IMF adopted SDR to substitute the function of settlements.
       • Depart from the centers again.

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THE ROLE OF OFFICIAL GOLD RESERVES
• Contemporary role of Central Banks on gold market:
   • New generation managers of central banks:
      • Unnecessarily to allocate gold in the reserve position,
        because gold generating no interest.
   • Conservative managers of central banks:
      • Gold holdings is not for pursuing profit, but for stabilizing
        finance and serving the function of final settlements.
      • Otherwise, the global system would stand upon foam
        constructed with credit.
      • Capability of defensing speculative activities.
      • Negotiation power in participating int’l business.

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ADEQUACY OF OFFICIAL MONETARY RESERVE

• Minimum required reserves for open economies:
   • Sustains the confidence of people in carrying currency.
       • The amount of short-term external debt.
   • Maintains the needs of domestic consumption and production.
       • The volume of 4 months import.
   • Prevents from sudden stop for external capital and sudden
     flight for internal capital.
       • The amount of 15% of M2.

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ADEQUACY OF OFFICIAL GOLD RESERVE
• Proportion of gold to total reserve
   • Eurozone: 27.5%
   • Washington Agreement: 29.6%
   • ECB: 15%.
   • A survey on 109 countries: 13%
• Criterion:
   • No definite one.
   • average of meaningful reference countries with the
     conditions on stable economic development, and capable of
     passing through financial crises smoothly.

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METHODOLOGY AND SPECIFICATIONS
• VECM:
  yt   zt i  i i CBGt i  i 1t i yt i  c   m1m ,i xm ,t   t
                    q                    p                     M

• CBG_X:
   • X=World; X=AE; X=OECD; X=G8X=G20; X=O_GRR;
     X=U_GRR; X=EASN; X=C&I; X=EM.
• Others:
   • Table A1: variable definition, measure and sources.

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EMPIRICAL ANALYSIS
• Classical regression estimation:
   • Table 1 & 2.
• Unit roots test: ADF & PP
   • Table 3.
• Co-integration test: Johnanson
   • Table 4.
• VECM estimation
   • Table 5 & 6.
• Impulse response
   • Figure 2.
• Re-check with figures:
   • Figure 3a & 3b.

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CONCLUSIONS
• Who upholds the surging gold price?
   • Exchange rate fluctuation? Inflation? Economic or financial
     tension?
   • Why these factors bent cease, the price still stay hike?
   • Behaviors of the biggest market participants should not be
     ignored.

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CONCLUSIONS
• Several interesting outcomes have been achieved.
   • First:
      • Maybe by mass media we believe that all the central
         banks worldwide continuously buy in gold from market.
      • Empirical evidence manifests an inverse fact that the
         total gold holdings of central banks worldwide
         continuously descends, particular for the advanced
         economies’ position.

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CONCLUSIONS
• Second:
  • The mainstream countries do not play the leading role on
     the rising trend in recent decade.
  • The newly emerging industrialized countries’ central banks’
     gold holdings reveals their significant power in explaining
     the causality to gold price fluctuation.

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CONCLUSIONS
 • Thirdly:
    • Why EMs keep buying gold?
    • Intuitive answer:
       • Emerging countries are now on the way to
           industrializing rapidly, they need more quantity of
           monetary reserve.
       • For sustaining the balance and proportion of gold
           position in the portfolio of monetary reserve, the
           demand for gold then induced.
       • The increase in gold price would deliver one kind of
           short squeeze market effect to the central banks of
           emerging countries.

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Thanks for your
   listening!

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