Study of gold prices - empirical evidence

The objective of this project was to examine the factors which influence the price of gold, and to develop a gold pricing model that could forecast the gold price. With a simple-to-use gold pricing model, the average investor would be able to make use of it to forecast the gold price and subsequently arbitrage in the gold futures market. A literature review was carried out for this study, which suggested that demand and supply of gold, exchange rate, interest rate, and political stability were some of the factors that influence the gold price. Monthly data for the factors that were deemed suitable for our empirical study were collected for the period from April 1986 to February 1991 and were then fed into the Time Series Processor (TSP) programme. The multiple regression analysis carried out obtained an equation which explained significantly the relationship of factors like the price of crude oil, exchange rate, interest rate, money supply, and the stock market index to the price of gold. Even though the gold pricing model developed could successfully forecast the price of gold, accounting for 80 percent of the variation in the gold price, the model however has its limitations. Therefore, it is essential that the investor exercises caution when using the gold pricing model, and relies on his own judgement before deciding to arbitrage in the gold futures market.BUSINES