An empirical investigation into the possible determinants of the real gold price

Abstract

The aim of this dissertation is to perform an empirical analysis into the possible determinants of the real gold price. Using the knowledge obtained from a review of the economic literature (chapter 2) and a qualitative analysis of historical data (chapter 3), this study will quantitatively analyse the impact of several macroeconomic variables on fluctuations in the real price of gold. This will be done through the use of a polynomial distributed lag model, using quarterly data ranging from 1980 up to 2011. A second model using data from 1990 to 2011 will also be estimated to order to test the robustness of the obtained results. The main conclusion of this study is that throughout the past three decades, gold has been a reliable store of wealth against several economic 'ills'. Gold is a hedge against the dollar, weak economic growth, and inflation. Furthermore, evidence was found that gold tends to hold its value even during periods of financial turmoil and stress, such as the recent 2008 financial crisis. The results obtained from this study were found to be stable across both samples used, thereby implying that over the years, gold has proved to be a reliable source of portfolio diversification while at the same time reducing investors' losses during periods of economic turmoil.