Chapter 1
Introduction
1.1 Background of Study
The global gold market has recently attracted a lot of attention and the price of gold is relatively higher than its historical trend. In 2008 and early 2009 most metal prices fell and the global economy was in recession. Many mining companies had difficulties surviving during this period. Some reduced their production rates and postponed projects while others switched to hedge instruments or long-term contracts to guarantee commodity prices.
Prerana,B. et al (2013) define the gold as the most precious metals and valuable. It’s become symbolic in life. Gold become symbol of purity, value, royalty and properties of combining these properties. Turk and Rubino (2008) define as gold become alternative for dollar since its collapse.
Cash flows in mining projects are volatile and are significantly influenced by the fluctuation of mineral commodity prices. The price and production behavior of gold differs from most other mineral commodities. In the 2008 financial crisis, the gold price increased by 6% while many key mineral prices fell and other equities dropped by around 40% (Shafiee S. and Topal E.,2010). Like other goods, gold price depend on supply and demand. Gold is storable and the supply is accumulated over centuries.
In global view, there are broad of studies on determinants that contribute to prices of gold. According to Toraman C, Basarir C, and Bayramoglu M. F., the variables that are thought affect the gold prices are oil prices, silver prices, USA exchange rate, USA inflation rates are analyzed from 1992 until 2010.
Figure 1.1: Fluctuation gold price in Malaysia
The Figure 1 shows the fluctuation gold price in Malaysia. We can see that along the price of gold increase from 2006 until it reached its peak at 2011 until 2013 and slowly decrease until this year. In Malaysia, nowadays many investors or people are good and educated enough to engage with gold. They will update the current gold prices in order to grab the chances where they can buy gold at lower prices and sell it at high price later on. So, in our study, we want to determine the most important determinant of gold price. This study will begin with the problem statement and a little bit explanation of factors affecting gold price in the literature review. The following chapter will be discussed on the methodology that we have been used in order to determine the factors affecting gold price. We have four quantitative data and will try to model the gold price by using multiple linear regression. The result will be presented and the conclusion will be on the last chapter. We will study the determinants of gold price in Malaysia by analyzing 9 years data from January 2006 until September 2015.
1.2 Problem Statement
Detrixhe (2011) highlighted that the downgrade of S&P rating on US Treasury Bond from AAA to AA+ was the reason for the highest price of gold breakthrough. He mentioned that from the first quarter of 1980, gold price vigorously increased from USD 38.50 per ounce to USD 631.10 per ounce. Since this trend ongoing until the gold price reached the peak level at August 2011. So, the gold price has the highest price of USD 1917 per ounce. Yi Tian (2011) said that, since the downgrade of S&P rating on US Treasury Bond from AAA to AA+, it led to US debt crisis. So, many investors lost their confidence towards US Paper Currency. So, they tend to shift their investment into gold that can protect their investment value. This is the reason of gold have higher demand and the gold price increase until USD 1917 per ounce in August 2011. Choong et. al (2012) mentioned that some investor become worried due to high gold price. This is because gold price may not stay long lasting at current increasing trend. In Malaysia, Datuk Meer Sadiq Habib said that the price of 916 gold has dropped to RM156 per gram previously in the early of 2013. Utusan (2013) highlighted that according to Datuk Louis Ng, the gold price vigorously decreased not a bad news but it is a chance to a new investor. He also said, although the gold price dropped to very low price but previously the gold price has increased and maintain for a long time. So, in our study, we would like to find out the factors that contribute to the gold price in Malaysia.
1.3 Theoretical Framework
Figure 1.2: Theoretical Framework of Gold Prices in Malaysia
We have decided to use four independent variables to find the most significant variable that contribute to the gold price in Malaysia. The first independent variable is inflation rate. Inflation rate is a worldwide macroeconomic problem owing to its adverse implication for economic expansion. Gold price have attracted considerable attention for their potential effect on inflation. Second independent variable refers to silver price. Silver price generally tends to exaggerate gold price and substitute goods of gold. Third independent variable is crude oil price. The main idea behind the gold and oil relationship is the increase in the price of oil result in increased prices of gasoline which is derived from oil. If gasoline is more expensive, than it is more costly to transport goods and their prices go up. Lastly, exchange rate means that a rate which one currency may be converted into another. Gold is a prime candidate for a study of the effects on commodity prices of fluctuation in major currency exchange rates.
1.4 Research Questions
Below are the research questions for this study. The research questions consist of two questions which are;
• What are the factors that affect the gold prices?
• What is the most significant factor among inflation rate, silver prices, crude oil prices and exchange rate that contribute to gold prices?
1.5 Research Objectives
Below are the objectives that we want to achieve. There are two objectives in this study.
The objectives for this study are to determine:
• The significant factor that affect the gold prices.
• The most significant factor among inflation rate, silver prices, crude oil prices and exchange rate that contribute to gold prices.
1.6 Research Hypothesis
Below are the research hypotheses in this study. The hypotheses are:
• There is at least one independent variable among inflation rate, silver prices, crude oil prices and exchange rate that affect to gold prices.
• There is a significant relationship between inflation rate and gold prices
• There is a significant relationship between silver prices and gold prices
• There is a significant relationship between crude oil price and gold prices
• There is a significant relationship between exchange rate of one USD/MYR and gold price
1.7 Scope and Limitation
This study focuses on the gold price for each month starting from January 2006 to September 2015. This means that it only involves 117 samples of data. The data that we used is the secondary data that are obtained from The Central Bank of Malaysia official portal and other international website. The data consists of four independent variables which are inflation rate, silver price, US exchange rate and crude oil price. Other variable that may affect gold price are not use. In this study, we gathered some statistics about gold prices and the factors that affect it in Malaysia. We are using multiple linear regression model to analyze the data. The major conceptual limitation of all regression techniques is it can only ascertain relationships, but we can never be sure about the underlying causal mechanism.
1.8 Significance of Study
Gold is the most precious metal that is popular for investment. Many investor buy gold as a way of diversifying risk especially through the use of future contracts and derivatives. Some people also buy gold not only because of its value but it also because it is easy to store, easy to transport, and is very useful in many modern applications. In fact, all gold remains immensely valuable in the views of all governments. That is why every central bank of any significance buys and holds gold in reserve in a world of almost universal paper money. So, this research will help the investor and people to find the best time period to buy and trade the gold. Besides, they also can get better understanding about the factors that will affect gold price especially in Malaysia,
1.9 Definition of Terms
• Gold is a chemical element in its purest form; it’s a bright, slightly reddish yellow, dense, soft, malleable and ductile metal. Gold is a precious metal which has a long and illustrious relationship and continues to do so. Gold served as money until other form of currency were devised and even now gold is used for an investment (Michael, 2007).
• Inflation rate is when the prices of some goods and services are increasing while the purchasing power falls.
• Exchange rate means that a rate which one currency may be converted into another. It is being used when simply converting one currency to another such as for the purpose of travelling to another country or engaging in speculation or trading in the foreign exchange market (Martin, 2011).
• Crude oil is a mixture of naturally occurring hydrocarbon that is refined into diesel, gasoline, heating oil and literally thousands of other products called petrochemicals. Crude oils are named according to their contents and origins and classified based on their per unit weight (specific gravity) (Martiani and Rahfiani, 2009).
• Crude oil price refers to the gasoline. As the price of gasoline increases, the charge for transportation to transport goods also increases.
• Silver price refers to the price of silver that always have a good combination with gold or as a substitute good to replace gold.
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http://goldprice.org/gold-price-malaysia.html