Gold has been valued as a global currency, a commodity, an investment and used as jewellery for thousands of years. Most people believed that gold is safe haven asset because it hedge against inflation and dollar depreciation. Gold can store their value over the long period. For investors they bought gold as tactical assets in order to capitalize the positive price outlook or to maximize the return from gold trading. Gold also used to help diversify a portfolio in order to minimize the risk of investment while enhancing higher return. The price of gold does normally not affected by other mainstream financial assets in the economy. Gold price also do not correlate with commodities like silver, crude oil, coffee S&P Index and other commodities. The gold demand is mostly used for industrial sector, jewellery and as an investment. In Malaysia, gold usually will be used as jewellery. However nowadays, many investor and public people are more aware about the important of holding the gold as an investment. They will buy the gold today in order to resell it later at a higher price thus they will gain profit from that trading. On 1 June 2012, the gold price is at US$49.93 (or RM159.58) per gram different from 5 years ago, gold prices were only around US$20. For this shorter period the gold price had double increased. Thus this study objective is to evaluate the factors that influence the gold price in Malaysia.
History of gold gold began in the Middle East about 5000 years ago. In the tomb of Queen Zer and of Queen Pu-abi of Ur in Sumeria, the oldest pieces ofA gold jewelry, Egyptian jewelry were found and are the oldest examples found of any kind of jewelry in the third millennium BC. Egypt and especially Nubia had the resources thus make them as a major gold-producing area for much of history. About 400 years later, 1091 BC gold became legalized money in China. It took another 450 years until Lydia minted their own gold coins and in 58 AD, the Romans followed suit. By the time England chose a monetary system which was based in gold and silver in 1377 AD, gold had taken its place amongst silver as a medium of exchange. When Egypt and the Roman Empire were in their full glory, gold was produced in the region of 1 tonne annually. The production of gold fell back under less than a tonne annually in the Dark- and middle Ages (500 – 1400 AD). In 15th century, when the gold coast of Africa produced about 5 to 8 tonnes annually, gold production grew notably. The discovery of America opened new possibilities for gold producers and Brazil started to produce gold in the early 18th century. The second era of gold production started in 1848 with the discovery of Sutter’s Mill gold on the American River. This started the gold rush and output from California soared, reaching 77 tonnes in 1851. Gold findings in Australia the same year raised world production to 280 tonnes in 1852. In 1898 South Africa took the lead in gold production and since produced about 40% of all the gold ever produced. (World Gold Council, 2006a)
The price of gold is like other traded assets which are subject to the ups and downs in the market. Unpredictable factors that can influence the gold price such as natural disasters, the discovery of new gold deposits, the role of the central bank, inflation, interest rates and exchange rate and the price of other commodities. The price of gold has fluctuated since the gold exchange standard was abolished in August 1971 that is when the IMF founded after the World War II each member was required to peg their currency to the US dollar and the US dollar was pegged to gold. (Bretton Woods System). Under the scheme, the US promised to fix the gold price at approximately $35 per ounce. Since 1971 the gold price has been highly volatility ranging from US$850 in 1980 decreased to US$252.90 in 1999. The period from 1999 to 2001 marked the so-called Brown Bottom after a 20-year bear market. Prices increased rapidly from 1991, but not exceeded the price in 1980 until 2008 when a new maximum of $865.35 was set on January 3, 2008. On March 17, 2008 the price has increased to $1023.50 and this was set as another record price. Gold’s bull run started in April 2001 when the price slowly lifted from US $255.95/oz just higher than the 20 year low of US$252.85/oz on August 1999. Overall, since April 2001, the gold price has more than tripled in value against the US dollar. Between years 2001 to 2009 the gold price rose of 293% that is from US$276.50/oz to US$ 1087.50/oz, and has an average compounded annual return of 18.7%. From June 2009 upward, gold markets experience renewed momentum upwards due to increased demand and a weakening US dollar.
In Malaysia there are five banks that offer such gold investment accounts. These banks will use passbook savings account concept. Passbook will be given to the gold investors and every transaction will be recorded in the passbook. Its functions exactly the same like conventional passbook savings account. Bear in mind that different bank offer different rate of charge or fees. Five banks that offer such gold investment accounts are: UOB Bank Premier Gold Account or Gold Savings Account Public Bank Gold Investment Account Maybank Gold Investment Account Kuwait Finance House Gold Account-i CIMB Bank Gold Deposit Account Gold price in Malaysia is traded in Malaysian Ringgit (MYR). The investors or public person can find the daily reports about gold price in Malaysia from Gold Price Network website which is a free service provided. The gold price is count based on Malaysian Ringgit per ounce, gram, and kilo gram in different carats 24k, 21k, 18k, 14k, and 10k. Gold Savings Passbook Account (GSPA) VS Gold Investment Account (GIAGold Investment in Malaysia Public Bank (GIA) vs Maybank (GSPA) public bank passbook savings account Maybank GSPA gold savings passbook account gold rate gold price today gold investment account Gold GIA current gold price ) From the table, there are not much of different between both banks. The investors should go further analysis before decided to make an investment. Maybank – Gold Savings Passbook Account Public Bank – Gold Investment Account Selling Price (RM/gram): 109.29 Buying Price (RM/gram): 101.30 Price Difference: RM 7.99
Selling Price (RM/gram): 106.28 Buying Price (RM/gram): 102.12 Price Difference: RM 4.16
Source : Maybank and Public Bank
The Malaysian gold bullion coin, known as the Kijang Emas issued by Bank Negara Malaysia launched in 2001 by Y.A.B. Dato Seri Dr. Mahathir Mohammad, the previous Prime Minister of Malaysia. Malaysia is the 12th country in the world that issues its own gold bullion coin. Now the Kijang Emas had joined the ranks of other international gold bullion coins. The design of the Kijang Emas depicts a barking deer (“kijang”) in its natural habitat in the Malaysian jungle. The reverse side features is the hibiscus, which is a national flower of Malaysia. 1 Troy ounce Kijang Emas RM200 Face value: RM200 Gold Purity: 99.99% Standard weight: 31.105g Diameter: 37.00 mm 1/2 Troy ounces 1/4 Troy ounces Kijang Emas RM100 Kijang Emas RM50 Face value: RM100 Gold Purity: 99.99% Standard weight: 15.550g Diameter: 28.00 mm Face value: RM50 Gold Purity: 99.99% Standard weight: 7.780g Diameter: 22.00 mm The trading or (purchase and reselling price) of Kijang Emas is determined by the prevailing international gold market price. The Kijang Emas is minted by Kilang Wang Bank Negara Malaysia and distributed by Maybank Berhad. The detailed specifications of the Kijang Emas is as follows:
1 troy ounce RM200 31.105 37.0 99.99% 1/2 troy ounces RM100 15.550 28.0 99.99% 1/4 troy ounces RM50 7.780 22.0 99.99%
Gold Bars Investing in gold bar is the most traditional way. Gold bars generally carry lower price premiums if compared to gold bullion coins. Investing in gold bar will carry the risk of forgery because of their less stringent parameters for appearance. Gold Coins The easiest way to owning gold is by purchased gold coins from a variety of both large and small dealers. Gold coins are priced according to supply and demand and their real weight, plus a small premium. Exchange-Traded Products (ETPS) Gold exchange-traded products like CEFs, ETFs, and ETNs are traded like shares on the major stock exchanges. Gold ETPs is an easy way to get an exposure to the gold price, without the inconvenience of storing physical bars. Certificates There are two types gold certificates that is allocated (fully reserved) or unallocated (pooled). Gold certificates can help gold investors to avoid the risks and costs associated with the storage and transfer of physical bullion. The risks that investors may face with like theft, metallurgical assay costs by taking on a different set of risks and large bid-offer spread. Accounts Many banks offer many types of gold accounts where gold can be instantly bought or sold just like any foreign currency on a fractional reserve basis. The most important differences between accounts are whether the gold is held on an allocated (fully reserved) or unallocated (pooled) basis. Derivatives, CFDS And Spread Betting Derivatives currently trade on various exchanges around the world and over-the-counter (OTC) directly in the private market such as futures, options and gold forwards
The price of gold are always fluctuate in the market. There are many factors that can influence the gold price, such as the discovery of new gold deposits, natural disasters that destroy gold mines, the role of the international financial system, inflation, interest rates and alternative investments, dollar exchange rate and lastly the irrationality of investors. Jonathan A. Batten and Brian M. Lucey (2007) had studied the volatility structure of gold market, trading as a futures contract on the Chicago Board of Trade (CBOT) using daily data from January 1999 to December 2005. They found that the nature of volatility in the gold market is consistent with the complex interaction of price sensitive information from other asset markets rather than the price discovery actions of traders within the gold market itself. Dirk G. Baur (2012) found a positive gold price changes as a signal for future adverse conditions and uncertainty in other asset markets. This introduces uncertainty in the gold market and thus higher volatility. The inverted volatility effect of gold can lower the aggregate risk of a portfolio for specific correlation levels. The Table 1 and chart 1 below shows the average price of gold from year 2005-2011. Table 1
1,571.52 28.34% **Prices from 2005-2011, Kitco.com, based on the London PM fix. The gold price is usually less volatile than other major stock market indices, such as the S&P500, and is much less volatile than other commodities. There are good reasons why gold is less volatile than other commodities. First reason is the gold market is liquid and deep and has supported by the availability of large above-ground stocks. Furthermore gold is virtually indestructible and almost of the gold that has ever been mined still exists. It differs from other base metals or other precious metals such as silver, which much of it is in near-market form. As a result, in the event of a sudden rapid increase in supply or demand, recycled gold can be reused, and it frequently does. Thus this will dampen any brewing price spike in the market. The second reason is the geographical diversity of mine production and gold reserves. These are much more diverse globally than other commodities, such as oil where production is highly concentrated in the Middle East. This leaves gold much less vulnerable to a regional or country-specific economic or political shock. In 2010 gold’s annualized volatility came in at 16.1 percent lower than 21.4 percent in 2009. According to the World Gold Council (WGC) last year’s volatility is on par with gold’s annualized volatility has averaged 15.8 percent. The annualized figures for crude oil and the S&P Goldman Sachs Commodity Index were 20.84 percent and 28.4 percent, respectively. Gold Price volatility is peaking at a price of $1,420 on the London Exchange on December 2010,A gold prices decline 3.7 percent in January 2011. According to WGC. over the past 10 years monthly gold’s average volatility in a given month is 4.9 percent. Melvin and Sultan (1990) who conclude that political unrest and oil price changes are significant determinants of volatility in gold prices. Fleming, Kirby, and Ostdiek (1998) show that cross-market hedging and sharing of common information can transmit volatility across markets over time.
Over the past 35 years, the average annual real rate of return on gold was 1.56 percent. However, it has fluctuated over shorter time periods. Returns for gold are easier to figure out than for cash, bonds and stocks. There isn’t a discount rate for the metal, and there aren’t any payments to include in the calculations. Returns are directly based on whether the price of gold increases; investors forgo interest they would have received from bonds or dividends that go along with stocks. Gold futures add more variables to the return equation. Researched by Colin Lawrence (2003) there is low to negative correlation between returns on gold and those on stock markets, whereas it is well known that stock and bond market returns are highly correlated with GDP. This is because, generally speaking, GDP is a leading indicator of productivity: during a boom, dividends can be expected to rise. The largest gain for gold is from 1978 to 1979, when the price doubled increased from $208 to $459 with a return of 98 percent. If the investor had bought gold in 1979 and sold it in 1984 and 1989, the real rate of return would have been -14 percent and -6.5 percent respectively. Since 1998, the price of gold has increase at double-digit annual rates. The real rate of return of on gold purchased in 2009 at $1,087.50 and sold at the end of 2010 for $1,420.25 would have been 28.5 percent. For long-term, gold investments have not done well. For example gold purchased in 1975 at $129/ounce would have sold at the end of 2010 for $1,420.25 for an annual real rate of return of 1.56 percent. In contrast, the real average annual rate of return for Standard & Poor’s 500 Composite Stock Index from 1975 to 2010 was only 8.4 percent. The Comparison Of Return For Gold With Other Commodities YEAR VALUE SP 500
VALUE SILVER ($) VALUE GOLD
RETURN SP 500 ($) RETURN SILVER ($) RETURN GOLD ($) 2008 142,317 70,637 64,555 10.34% 6.19% 5.63% 2009 114,343 84,285 84,990 8.54% 6.79% 6.84% 2010 140,892 140,970 92,852 9.18% 9.18% 6.90% 28-Apr-11 173,400 233,917 115,889 10.28% 11.84% 8.12% 18-May-11 170,931 166,144 112,880 10.20% 10.05% 7.98% During 2010 WGC highlights the risk-adjusted gold performance in was able to turn in. Gold return was 29.5 percent both higher and less volatile than the MSCI Emerging Markets Index and the S&P 500 Index.
People marketing gold investment products will always describe gold as an “inflation hedge”. Inflation define as the general rise in the price level and use changes in the CPI as the measure of monthly inflation. More recent data showed that gold has continued to hold its value versus the dollar. A.C. Worthington M. Pahlavani (2006) indicates that a strong co integrating relationship exists between gold and inflation suggesting that gold is a useful inflation hedge in the post-war and post-1970s period. Some studies found that the prices of gold have a positive correlation with inflation and inflation can be used as a leading indicator to predict the price of gold (Sherman, 1983 and Moore, 1990) found. While Christie-Davie et al.(2000) studied found that it takes 15 minutes for the price of gold futures to respond to the announcement of inflation, and this proving that unexpected inflation helps to predict futures gold prices. On the other hand, Jaffe (1989), Garner (1995), Larson and McQueen (1995), Cecchetti et al. (2000) conclude that the gold price is not affected by inflation. Some others also show that inflation in countries other than the US does not accurately predict the gold price and proves that gold cannot hedge against inflation in many countries. Studies using data including the pot -1999 periods of gold price hikes also failed to prove the relationship between inflation and the gold price.
Gold has its own standard of value. Gold standard is a monetary system where the standard economic unit of count is a weight of gold. It defines as “national money and other form of money bank deposits and notes were freely converted to the gold at the fixed price. It is ideally fixed and not subject to change. A true gold standard came to fruition in 1990 with the passage of Gold Standard Act. Gold standard can be either internal or international. In internal gold standard, the holders of paper money can redeem it for gold and in international gold standard, only certain entities, for example central banks, can demand the exchange. (Helsinki 2007). England was the first nation to adapt full gold standard in 1844 and Bank of England notes, fully backed by gold, were the legal standard at that time. The period from 1880 to 1913 is often called the “classical gold standard.” It featured a core of nations, led by the Bank of England. The main gold standard of Europe was maintained by the Bank of England. The Bank of England adjusted interest rates to maintain the price relationship of the pound to other major currencies. In United States, the gold standards are effective when President Franklin D. Roosevelt not allowed owning private gold at the end of 1933.After that period, Bretton Woods System enacted in 1946 and however ended in 1971 when President Richard Nixon ended that trading. Bretton Woods System allowed governments to sell their gold to the United States treasury set fixed exchange rates of $35/ounce. As gold standard was becoming more widely used, its network effects grew. Countries outside the gold standard had a hard time getting credit and exporting their goods and this attracted more countries to use gold backed currencies. Also, one of the main benefits of gold standard was the reduction in inflation volatility. The reasons why gold standard was so successful for so long are the Great Britain’s leading role in the 1900 century and its role in forcing the rules upon other members of gold standard. This led to a universal acceptance of the gold standard. And while the gold standard itself did not give enough flexibility to monetary policy to avoid shocks, wages and prices were flexible enough. (Bordo, 1993). Fan Fei and Kelechi Adibe (2010), people claim that as gold remains the eternal symbol of wealth in people’s minds; people will switch their investments to gold in ages of turbulence. Gold is the “safe haven” on the financial market. Gold represents a more credible means of preserving wealth compared with the alternative of holding US dollar denominated assets. Unlike paper money, turning on the minting presses cannot increase the supply of gold (Eric J. Levin & Robert E. Wright June 2006).
The aim of this paper is to investigate the different factors leading to the fluctuation of gold prices in Malaysia. The research objectives for this study are: To determine if the inflation rates can influence the gold price. To examine if the real interest rates will influence the gold price. To examine whether US Dollar will influence the gold price.
The finding from this study educates the traders about the factors that cause the gold prices to fluctuate. The information from this study will help new trader, old trader and the researcher before they are decide to make investment.
This study is all about analysis made to see the most factors that causes the gold prices to fluctuate in Malaysia. The analysis takes from the previous research report, journal finding from Gold Price Organization, Bank Negara Malaysia and Department of Statistic Malaysia from year 2007 to 2011.
This research is confined to the study on factors that cause the gold price to change on the short-run and long-run. The data will be collected by secondary data sources.
The research structures are divided into four which are chapter 1 is Introduction, Chapter 2 is for Literature Review, and Chapter 3 is for Research Methodology and last but not least is Finding Analysis. Introduction is to determine what the researcher wants to study and analyze to archive the objective of the study. While the literature review is a step by step process that involves the identification of published and unpublished work from secondary data sources on the topic of interest, the evaluation of this work in relation to the problem, and the documentation of this work. Research Methodology is for explain how the research can achieve the objective of the study and for chapter four is finding where the researcher finding the data to analyze and to know the where there have relationship between dependent variable and independent variable.
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