Economists think the price of gold is uncertain but approximate. They communicate estimates like any other product with increasing production costs.
Gold experts and dealers, by contrast, follow an old economic tradition that emphasizes the financial role of existing gold stocks, surpassed by two orders of magnitude for new annual metal-output levels. Gold prices are thought to be largely based on international macroeconomic variables and expectations of change in world trade.
None of these methods have predicted good prices. The main problem is that investment needs cannot be considered as a change in inventory of producers for precautionary or speculative purposes only. Like other products. Thus if we claim that manufactured demand will increase in proportion to the world’s gross national product (GNP), Leontif et al., We get the forecast of annual global gold consumption in 2000 which is ridiculously high. E.g., two or three times 1980 output. If we were to supply such growth from new gold production, the price of real gold would have to rise to a constant-dollar level of $ 600 or $ 1,000 per ounce.
Clearly, these estimates are inconsistent with the past patterns of change in the supply and demand of gold, which demonstrates considerable sensitivity to price changes (price elasticity). This suggests to market experts that they reconsider the role of gold as a major source of value whose value responds less to the movement of manufactured goods and new gold production costs than to changes in previously mined gold stock holdings. Such asset holdings respond primarily to changes in asset prices, such as interest rates, inflation, and foreign exchange. Since prices are influenced by changes in macroeconomic variables, this second method attempts to relate gold prices directly to financial variables, but has not been more successful than the commodity method.
One of the reasons for the failure is that changes in gold stock holdings complicate the movement of international capital. Capital movements are driven by expectations of changes in asset prices and are sensitive to monetary policy uncertainty. These complexities discourage and confuse efforts to employ direct statistical analysis to explain the price movement of gold.
We recommend that international investors consider gold as the stock price for foreign assets in their portfolio as opposed to currency risk. Gold’s own value, exchange rate, price level, and interest rate are shown as alternative asset prices that enter with other external variables and assets with the needs of private and public investors here and abroad. These investors maximize utilities subject to monetary policy constraints and balance of payments balances. As investors seek to maintain the desired level of holdings of various foreign and domestic assets, markets for bullion or gold-producing stocks respond to the conditional expectation of a key rate change and the uncertainty that affects the value of the country’s currency. The challenge with this hypothesis is to find ways to test it experimentally.
Mine stock exchange is given a way around the difficulty. Since bullion and stocks of gold mining companies are gross alternatives, the use of capital-asset-value theory allows a simple test of this alternative model for North American gold producers whose shares are traded on the stock exchange.
Our results show that new gold-producing trends and price movements are not an easy task to predict products by conventional gold-market analysis. Gold is better predicted as the stock price determined by the stock exchange. This means a much more volatile market whenever financial expectations are dominant. Such periods are represented by the size of the premium which is above its production value for gold. This can be two to three times higher than normal, which is enough to discourage significant growth. About this premium level, irregular price cycles arise from the movement of stock positions among investors while adjusting to the global financial balance. Price variability is related to the sensitivity of the fabricated demand to the price. We show that investors who monitor macroeconomic variables in a fully identified model can successfully hedge against currency devaluation and gamer capital gains through a phased strategy that includes gold securities in their investment portfolio.