Gold price determinants: empirical analysis and implications

Abstract

This paper explores factors that can explain variation in gold price over time. We employ the Kaufmann-Winters (1989) model for an extended period (1971-1998), and modify it by considering factors reflecting gold supply and demand as well as a proxy for stock market. We also use factor analysis for the period 1990-2001, finding that gold price was primarily determined by the level of central banks' sales of gold reserves, stock market activities, the value of the US dollar and gold production-fabrication forces. Our results indicate that the factors that impacted gold price in the 1980s were different in the 1990s. Based on factor analysis results, we recommend, as a partial fix for current turbulence in the world financial crisis and credit crunch, that governments replenish their gold holdings to stabilise their currencies, and that investors consider gold in their portfolios as a store of value and a diversification tool.