Group Assignment - 01

What factors affect the international price movement of GOLD

Shivam Gupta (247)

Revati Gupta (239)

Vidhyanshu Gaur (258)

Piyush Kumar (273)

Melissa (230)

FACULTY OF MANAGEMENT STUDIES

UNIVERSITY OF DELHI

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 TABLE OF CONTENT

INTRODUCTION 3
BACKGROUND & MOTIVATION 4
RESEARCH METHODOLOGY 5
FACTORS AFFECTING GOLD PRICE………………………………………………………………………………………………6
1. GOLD v/s CRUDE OIL…………………………………………………………………………………………………. 6
2. GOLD v/s STOCK MARKETS…………………………………………………………………………………………8
3. GOLD v/s DOLLAR INDEX…………………………………………………………………………………………….9
4. GOLD v/s REAL INTEREST RATE…………………………………………………………………………………11
MULTIPLE REGRESSION ANALYSIS…………………………………………………………………………………………… 12
FINDINGS & CONCLUSION………………………………………………………………………………………………………..13
REFERENCES……………………………………………………………………………………………………………………..……..14
APPENDIX………………………………………………………………………………………………………………………………..15

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INTRODUCTION

‘Gold’, a noble metal in chemical world, a financial asset in the world of finance’ has been since long a matter of pride, status and sometime even wars.
Looking back into the history, a system called “gold standard’ was in place worldwide. Under this system the country can only issue the currency if they
have sufficient gold reserves to back it. Even currency was backed by the gold reserves. In order to issue currency in the economy more quantity of gold had
to be mined. This was one of the reason for scrapping of the gold standard. At the peak of World War 1 when the countries were facing a challenge of
meeting their war-expenses, the struggle to mine more quantity of gold in a short period of time for the purpose of printing currency for funding different
war-time needs was done. This marked the end of the ‘gold standard’.

After that a new system called gold exchange standard was put into place. As a result of Bretton Woods Agreement the dollar was pegged to gold. The
exchange rate of that was $35 per ounce of gold. US Dollars became the globally traded currency. The countries can get dollars for international trade only
if they part of with their gold reserves. After 1973 some European countries let their exchange rate float against and convertibility of dollar against gold
ended and under these circumstances gold has lost the property of being a mean of exchange and become a personal saving tool and a part of Central Bank
Reserves. Gold price is determined by different factors, such as the US dollar to Indian Rupee exchange rate, inflation rate, crude oil prices, US dollar short
term and long term interest rates, and US real Gross Domestic Property (GDP).

Gold (Au) has three crucial properties: The First is that it is relatively rare - common enough that most cultures understand it, but rare enough that the
demand almost always exceeds supply. The Second is that gold does not rust. Gold is incorruptible. Third is that gold is way more than a commodity. It is
not like just another metal. In India especially gold has an emotional value attached to it. This is primarily the reason why the demand of gold does not die
in an economy like India although we may be having enough gold stock in the country. These three things make it a useful, durable, persistent store of
value. It will almost always be accepted, and it will not diminish under normal circumstances.

Recently, gold demand has increased because of its usage in two areas – in industrial goods and in the jewelry sectors. Although, the importance of gold has
been decreased due to financial sector developments. In addition, the financial crisis and individuals need for more secure investment tools has resulted in
rapid increase of demand for the gold.

Gold is one of the most liquid asset and is acceptable all over the world. You can convert it to cash at anywhere in the world. So, it is also one of the reason
why it is in such demand.

So, there are certain questions which we have answered here in brief and have discussed the broader aspect as to what factors exactly influence how gold
prices change time to time.

➔ Why do people invest in gold: Gold is a consumption as well as an investment product. People use it in jewelry, gold is also used for industrial purposes.
However at the same time people also invest their money in gold and keep it as an investment.
➔ How gold prices are determined: Gold like any other commodity will be determined by the demand and supply function. But there are some other
macro-economic variables that affect the prices of gold in the international market.
➔ What is the relationship between dollar value and gold prices: The US dollar is inversely related to the price of gold primarily because a high dollar
makes the gold and other commodities expensive in other countries and thus a fall in demand is seen which reduces the price of dollar.
➔ How do monsoon rains or the lack of affect gold prices in India: Rural spending on most items — from television sets to gold — goes up or down
depending on the monsoon as rains are crucial for the summer-sown kharif crop. Nearly 60% of total gold demand in India comes from rural areas,
most of which is bought during weddings.

BACKROUND AND MOTIVATION

Gold has an adequate value globally and owning gold will never be a waste of money or we will not regret it because you can sell it anytime we want either
with some increase or decrease in the price. For instance, most of the households are trying to purchase gold whenever they have a huge amount of money
because they know that gold will never lose its value as they can convert it into money whenever they want to. Gold is perceived as an investment product
and not a consumption product.

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The main motive behind working on this research paper was to find out the factors that have a significant impact on the prices of gold, working around the
logic why they do so. In the past many researchers and economists have studied and analyzed the gold price movement owing to different factors and have
come up with their conclusions. The objective of this research paper is to check their validity in today’s scenario and finding out what holds true when gold
prices are concerned. This research paper discusses how in the past gold has been influenced by various commodities and how these trends can give an
idea about the future prices.

RESEARCH METHODOLOGY

For the purpose of our analysis we have taken the month beginning gold prices from January 1 2000 to June 1 2016 which is a total of 198 data-points. The
data is Secondary in nature and has
been sourced from various websites and Apart from that we have taken data of crude oil, inflation, S&P 500 index, Dollar index for the same time period.

In order to study the relationship of variables such as crude oil prices, inflation, dollar index and S&P 500 return on gold prices, we have run a correlation
analysis. The correlation analysis will tell the magnitude of change in gold prices due to change in different variables.

Second thing we have done is a regression analysis on those factors which have strong correlation with gold prices and also finding out the magnitude of
the dependencies. The objective is to find out whether the behavior of gold prices can be predicted or not and secondly finding out the ‘least squared
errors’ line for accurate forecast.

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Role of Gold in world economy

Although The Wall Street Journal lists gold as a commodity, and scorns the concept of gold as a currency, it continues to play its ancient role as the
only true standard of value in times of war or crisis. These are presumably times of peace, but in fact we are riddled with cultural wars that continue
to evoke murders, bombings, riots, and rebellions on the international stage.

A new level in this global conflict was reached fairly recently when Stuart Eizenstat, a former senior Carter Administration official and until recently
an Undersecretary of Commerce,(1) issued a report accusing Swiss banks of accepting "gold pulled from Holocaust victim's teeth intermingled with
central bank gold" during World War II, and later refused to return the deposits of Holocaust victims to their heirs.

This Report escalated a campaign against Swiss banks led by former Fed Chairman Paul Volker, who has been appointed head of an Independent
Committee of Eminent Persons, to audit the records of Swiss banks for the deposits of Holocaust victims. Lawsuits claiming very large sums have
been filed, and the air is thick with charges hurled by the headline-seeking Senator Alfonse D'Amato, indignant denials fading into apologetic offers
from the Swiss government, and the abrupt dimming of Switzerland former reputation as a tiny, remarkable democracy, into a nation and system
motivated by unconscionable greed.

Nazi gold, in other words, is not unimportant even after 57 years. All gold, in fact, 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.

Gold retains value under a variety of circumstances

The reason for this is not mysterious. History tells us that only gold retains its value during wars and upheavals, changes of empires and
governments, and times of crisis. Although now officially held to be of only industrial value, gold is the oldest and most respected currency in the
world and the only one respected when national paper monies lose value. Islam, the Orient, and citizens everywhere familiar with the uncertainties
of governments such as in Italy, France, Asia, Africa, central Europe, and Latin America, often bank gold in private repositories.

Some indication that such times loom today can be gained by the recent effort of Chancellor Helmut Kohl to improve Germany ability to help create a
common European currency. This program, which instead of uniting has greatly divided Europeans for several years, and is encountering continuing
difficulties. Its main sponsors France and Germany established certain requirements before the nations involved can weld their currencies and issue
a new common currency. These requirements now embarrass both governments. Their unemployment statistics are insupportably high, and their
debts are beyond the minimums established for entry. Chancellor Kohl wanted to alter his nation economic statistics (though not circumstances) by
raising the value of the 95 million troy ounces of gold held in the reserves of his nation's central bank (3) to its market price.

If the bankers had agreed, that would have allowed Kohl not only to balance his annual budget, but would have made several billion marks available
to fund his entry into the European common currency as well as launch efforts to both save his welfare state and to placate his unemployed with new
programs. Although it is unlikely that the Chancellor thought about it, the fact is that his proposed solution exactly paralleled the one chosen by
President Franklin Roosevelt when he first took office in 1933. The new president first persuaded Congress to enact enabling legislation granting his
office the power to demand all gold held in private hands under pains of fines or imprisonment or both, and then raised the price of gold. That
launched an inflation that enabled the White House to launch its governmental employment programs, and become the idol of the poor and
unemployed. Helmut Kohl was not as fortunate as President Roosevelt. Germany central bank, irretrievably scarred by memories of not only the
inflation of the early twenties but also by the worthless paper left to the people by Hitler, brusquely refused to cooperate in changing the official
price of gold in reserve to the far higher price of gold in the marketplace.

In the meantime, however, the frugal Swiss, under intense bombardment by the American Jewish community, "released" some of their reserve gold
and raised it to the market price, in order to fund a special effort to locate and repay survivors of the Holocaust from the deposits they made during
the thirties and forties if they (or their heirs) can be discovered.

It is interesting to note that both steps one refused and one accepted treated gold as currency by cashing it in the marketplace. That is as close to a
return to a gold standard as any German administration has come in fact since its recovery in post World War II. Switzerland, of course, has always
been on a gold standard in the sense established after World War I. It will of course be recalled that at one time the international financial
community relied upon a real gold standard. Paper currencies were issued, backed by gold. Citizens could present paper money to banks and receive
gold coin in exchange. (The West in the U.S. used silver dollars.) Raw gold could be turned in to the Treasury, which would mint it and return it to the
citizen. All that ended in World War I.

In the twenties the franc, dollar, and pound were backed by gold and therefore had a relatively stable value. (That is one of the reasons why such a
heavy exchange of property took place in Germany in the early twenties, when those citizens who had access to "hard" money were able to buy
property at bargain prices from people beggared by inflation.) This was a factor in the rise of Hitler.

In the twenties, however, citizens no longer had access to gold through an exchange of paper currency with the banks. As the twenties extended, the
post-World War I depression was temporarily lifted by international loans and a credit inflation through the introduction of installment payments
for both tangible (farms, houses, and goods) and intangible property (stocks and bonds), which created production based on promises to pay. These
promises collapsed in late 1929 with the declines in the stock exchanges and losses in many banks. When payments were not met, bankruptcies
almost halted production; jobs vanished and a global economic crisis occurred. The crisis was especially severe in Germany when all banks failed.

The founding of the Bank for International Settlelments in 1930

The German debacle meant that World War I reparations, paid in the twenties by Germany from international loans, would cease. That brought a
group of international bankers together in 1930 to create the world's first international bank. It was named the Bank for International Settlements. It
originally consisted of the central banks of Belgium, France, Germany, Great Britain, Italy, and some commercial banks from the U.S. and Japan. In
1931 the Federal Reserve began active participation in the BIS, and soon more than two-thirds of the BIS funds in America were held by the Federal
Reserve.

All this resulted in the world first group of bankers operating internationally independent of their governments. Only the German directors were, in
this coalition, entirely controlled by their governments; later an exception of great value to Hitler. The charter of the new bank, approved by the
various governments, certified its immunity from "expropriation, requisitions, seizure, confiscation, prohibition, or other restrictions of gold or
currency export or import, or any other similar measures."(4)

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The role of gold was central in the creation of the BIS. The new bank was authorized to "arrange with central banks to have gold earmarked for their
account and transferable on their order, to open accounts through which central banks could transfer their assets from one currency to another and
to take such measures as the Board might think advisable within the limits of the powers granted. . . . Therefore the BIS was ready to lend gold
without delay. . ."(5) That meant that gold transfers from one central bank to another could be made quite swiftly and did not have to lag behind
physical transfers.

As the thirties extended and Hitler came into power, the situation of Switzerland worsened. Gestapo agents were especially interested in Jewish
properties and holdings, and began to make demands that Jewish deposits in Swiss banks be disclosed to German authorities. In 1935, as a measure
to protect German Jews, Swiss banks introduced secret numbered accounts. These enabled the Swiss banks to prove that depositors were not
identified by name, and that therefore their identities could not be disclosed.

That practice amounted to an expansion of Switzerland's ancient role as the protector of foreign funds deposited in Swiss banks safe from the
pressures of tyrannical governments. This tradition remains a very important one. Switzerland's name is almost synonymous with secret accounts. It
has always refused to open its books for investigation by foreign police in pursuit of refugees either political or financial from other countries.

Swiss bank secrecy originally encouraged by neighboring nations

This has been a cause of increasing irritation to American authorities ever since World War II, who have watched the steady increase of international
depositors into Swiss banks. Washington's frustration with Switzerland has been deepened by the fact that its influence in other nations has, since
World War II and the end of the Cold War, grown enormous. Both nations have, in fact, grown increasingly apart in recent years. Their differences
are economic, political, and moral. The United States is in the midst of what President Nixon launched and named a Drug War. This effort has led to
the expansion of American police authority to global levels. (6) The Swiss believe that an effort to escape taxes is human and understandable, and
not basically criminal. In the U.S., despite its former reputation for individualism, paying taxes until recent expansions has been considered the duty
of every good person.

An equal conflict consists between the U.S. and Switzerland regarding banking rules. In recent years the Drug War, and the huge sums it entails, has
led Washington to enact laws not only opening bank records of all transactions to the government, but rules that force banks to inform the
authorities of any transaction beyond the ordinary. (7) Switzerland's bank secrecy, created after the Vienna Conference of 1820 led by Metternich,
was deliberately encouraged by the leading nations of Europe as an escape from the confiscations of the type installed by the briefly-lived
Napoleonic Empire. (8)

World War II did nothing to lessen the Swiss belief that the inviolability of its banks was crucial to its survival though that survival was by no means
certain. "After Germany invaded Poland in September 1939, the Swiss army mobilized up to ten percent of the population and throughout the war
went through long periods when it expected imminent attack from the Germans. That Hitler wanted Switzerland as he wanted Europe for the rest of
his thousand-year Reich is well documented. As Gerard Weinberg writes in his history of the Second World War:

At 1:35 a.m. on June 25, 1940, the armistice between Germany and France went into effect; a few hours later orders went out of the high command of
the German army to prepare an invasion of Switzerland. . . .The plan was to crush Swiss resistance quickly. . . . It was never launched as more
important projects came to the fore in German planning. The end of Switzerland, that pimple on the face of Europe as Hitler described it in August
1942, would have to wait until Germany had defeated her European enemies.

"The estimate among Hitler's generals was that at least eighteen divisions were needed to dislodge the Swiss from their redoubts, and after the
failure to defeat Britain and the Soviet Union, the cost of a Swiss invasion became a mountain too far." (10)

During the war the BIS became the center of international trades even between the warring powers. Its directors were well acquainted and
congenial, and shared some interesting ties. Per Jacobson, economic director oft he bank,(11) was the brother-in-law of Sir Archibald Nye, Vice Chief
of the Imperial General Staff for the British Army. Meanwhile, President Roosevelt froze the gold holdings of most of the belligerent nations in Fort
Knox. At the same time, the governors of nearly all the European banks from France, Hungary, Romania, Italy, Spain, and Portugal as well as Germany
were regular visitors to the BIS in Basle.

Swiss National Bank vaults were, during this period, open to all trading nations. And as a neutral, Switzerland traded with all governments. If
Germany wanted to sell gold for grain or fuel, the Swiss National Bank moved the gold from Germany's share in the National Vault to the section
reserved for Portugal's gold. Meanwhile, while serving Germany's international needs, Switzerland was also dependent on Germany for its fuel
including coal and oil and most of its food. The tiny nation is, after all, landlocked, and Germany controlled all the land of Europe around it.
Switzerland only direct trading route by sea is down the Rhine river northward to the North Sea also controlled by Germany. Switzerland was
technically independent, but in reality its freedom was precarious. Its only window of free commerce was a strip of territory from Geneva to Vichy
France, which was severed when the Germans occupied all of France.

Swiss defense and military strategy before and during World War II

Yet Switzerland held some strong cards. If forced to fight, it could block access to its north-south tunnels whose rail lines would have cut Germany's
access to its forces in Italy. An invasion would also have ended the activities of the BIS bank, through which Germany traded gold with the world
beyond (and inside) Europe. The role of gold in World War II was, obviously crucial. In March 1938, when Hitler marched into Vienna, "much of the
gold of Austria was looted and packed into vaults controlled by the BIS. This gold was immediately credited to the Reichsbank accounts."

In March 1939 the Nazis invaded Czechoslovakia. Storm troopers, holding the bankers at gunpoint, ordered them to transfer their nation's national
store of gold, which they had placed in a BIS account in the central bank of England, transferred to the Reichsbank account. Jacobson afterward said
that the BIS learned only later that this transfer was ordered at gunpoint, but this statement can be disregarded as pro forma. The facts were that the
conquest of a small nation by a larger one is historically accompanied by a looting of assets, and Jacobson's added comment that "The Czechs never
held this against the BIS" can be taken as far more significant. Losers in a war seldom expect the world to be shocked.

Neither was trading with Germany unique in World War II. Spain, for instance, cooperated with Nazi Germany, although Franco did manage to obtain
the freedom from German concentration camps for thousands of Jews descended from Sephardic families, whom he had returned to Spain for the
first time in centuries. (12) The Irish, who had no such ancient ties, not only traded with the Nazis but gave their submarines refuge at a time when
their toll of Allied shipping was deadly. Sweden, which benefited economically from trading with both sides in World Wars I and II, allowed the
German army to cross Sweden without protest as part of this arrangement.

There is no question that fortunes in trading with and for Germany were also achieved by businessmen and institutions in Portugal as well as Spain,
in some U.S. banking circles and some large corporations as well as in Vichy France, Portugal, and Sweden. All these nations, (13)however, also

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rendered services to the Allies without which the war might well have tipped the German way. Switzerland, as not only the Dulles family but also
Winston Churchill pointed out, provided an invaluable listening post that kept the Allies apprised of events, policies, and even plans inside the Reich.

"Switzerland also protected its own 18,000 Jewish citizens completely, unlike France, which obediently deported thousands to Germany. Switzerland
did more: it accepted more Jewish refugees, in terms of percentage of population, than any other country. And Switzerland was and is a very small
country. Its population is only 7 million now, and was probably less then. More than 14,000 Jews escaped Germany to Switzerland during the same
period that 55,000 left for the United States and 15,000 went to France . . .[Switzerland also] accepted 50,000 French and Polish soldiers. In 1944 the
Swiss National Assembly voted to admit up to 14,000 Jews who were trapped in Hungary and were in the charge of Swedish diplomat Wallenberg.
But Eichmann allowed only 1,400 to leave." (14)

To put this into perspective, "the United States accepted only 21,000 Jewish refugees during the war."(15) In fact, the United States, which
retroactively assumes that its role in World War II was purely heroic, seldom admits that some of its bankers not only traded with the Nazis through
the BIS all during the war, but that the entire nation remained aloof when Britain fought Nazi Germany alone for two years. Even then, we did not
declare war against Hitler: he declared war against us. Otherwise we might have fought only against Japan.

Gold and the Cold War

These points are made not to review the war, in which an estimated 40 million persons died and more lost their homes, possessions, and relatives,
but to broaden the frame of reference beyond the fates of the bank deposits of only some sufferers in the largest of all the world many tragedies. One
later tragedy was surely the Soviet-inspired Cold War, which was unnecessary, frightening, and divisive for over a generation. In that long and
expensive continuation of war by other means, the role of gold continued to be central. The central banks continued to amass and hold massive gold
reserves, but all the governments functioned on paper money alone in the postwar world. From the end of World War II until 1971, the world
functioned with the United States pledge to buy gold at $35 an ounce, and to thereby maintain a dollar standard by which all other currencies would
be measured in the international marketplace.

In 1971, however, the Central Bank of France began to use its accumulated dollars to order gold from the U.S. Treasury in immense quantities. The
gold reserves in Fort Knox began to fade like summer snowballs. The dollar was falling, imports began to soar and President Nixon grew alarmed. On
August 15, 1971 he went on the air to announce a 10 percent Job Development Credit for investments in new equipment, a 7 percent excise tax on
automobiles to assist Detroit, a small tax break for individuals, a $4.7 billion cut in federal spending, an additional 10 percent tax on imported goods
a freeze on wages and prices for 90 days and a temporary suspension of the convertibility of the dollar into gold." (emphasis added.) (17)

Only specialists seemed to grasp the importance of the end of the gold-backed dollar. It meant that from the 15th of August 1971 through today, the
dollar has had nothing behind it but the promise of politicians and the printing press. The media in 1971, as economically feckless then as now,18
seemed to consider a "floating dollar" as they labeled it simply another arcane measure of importance mainly to bankers and international
speculators.

In reality it meant that a world currency was released to float as a balloon without limits, without roots, without stability, as high as the credulity of
the world would carry it. One result was the release of a flood of dollars that washed everywhere. The world eagerly accepted those dollars, because
the memories of the immense power achieved by World War II America had become imbedded in the mind of the globe. The legend of the dollar and
the wealth of the U.S. dazzled the world long after the dollar became simply another paper currency.

One result was that desperate people everywhere scrambled to obtain dollars that seemed to be safety nets from untrustworthy governments.
Dollars "floated" abroad through foreign "aid" programs, through loans to foreign businesses, to U.S. investments abroad, and from millions of
prosperous American tourists who seemed to be visitors from a remote earthly paradise.

The Cold War made this appear a reasonable and even necessary situation. The media discussed "Eurodollars" as though they were somehow
separate from the dollars used at home, on the theory that despite the fact that they issued from our Treasury printing presses, they were somehow
different. In effect, the U.S. internationalized its welfare state. American dollars rained upon virtually every nation in the world in an effort to prevail
in the Cold War, even as they enlarged our welfare rolls to maintain domestic political stability. This raised so attractive a lure to the world's poor
that our borders were besieged even while our guards were withdrawn or weakened by the Courts. As in previous periods of hysterical inflation
when paper money appeared to replace gold, from the history of China, the time of John Law in France, and the Tulip Craze in Holland, the laws of
economic gravity appeared to be repealed.

In 1975, a few years after President Nixon's amazing economic recklessness, (19) the U.S. Government restored America right to own and trade in
gold. Legal gold returned for collectors. As the international price of the paper dollar declined, the international price of physical gold rose.
Greenspan, chairman of the Federal Reserve, a former follower of Ayn Rand, regards gold as a measure of the "strength" of the dollar. Since the
purchasing value of today's dollar is roughly equal to a nickel in 1969, this does not mean much.

The beginnings of global U.S. Treasuries market

Meanwhile President Reagan, elected after President Carter watched the official U.S. interest rates rise to 20 percent and inflation soar, slowed
official inflation by slowing the Treasury's printing presses. He accomplished this, however, by switching the Treasury presses to bond issues. These
borrowings, slated to be repaid in the future, met with seemingly miraculous success in the international financial world. They crowd the vaults of
the central bank of Japan and many other nations, as well as the private holdings of tens of millions of patriotic Americans. Unfortunately, they are all
payable in dollars. What President Reagan accomplished was to halt the retail production of dollars, in exchange for wholesale borrowings.

One result was that foreign nations could hardly refuse to subscribe to successive new bond issues by Washington, lest such a refusal precipitate a
drop in the price of holdings already in their possession. Sales of these holdings may do the same. Such runs could bring down the great global
empire of paper dollars, which every government lists as assets.

This situation has long since alarmed the central banks of Europe. That is the reason for the European drive toward a common European "Euro"
currency to replace the dollar. The plan makes it clear that Western Europe does not want to be inside the house that Washington built when the
roof falls. This has led to a drive in both European and American financial circles to industrialize the Orient, through a multitude of joint ventures, to
avoid being caught in a global collapse. Meanwhile, every financial center is neck-deep in paper currency except for Switzerland.

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Switzerland alone has a gold-backed currency and bank secrecy. The Swiss franc is the only existing alternative to fiat money floating everywhere
else, whose purchasers (and depositors) represent very conservative investors. That is the reason that Europe led by France and Germany has been
attempting to put together a new global financial system that will continue the welfare state that is only possible with paper money and inflation.
Such a system cannot succeed indefinitely of course. It might last as long as the tenure of our present rulers and that is all that most rulers can
conceive.

But Switzerland, with its real currency, is an alternative and reachable system. As it stands, outside NATO and outside GATT and outside the new
Euro plans conceived in Berlin, Paris and Brussels, (20) it remains in silent competition to a New World Order that cannot be ignored. It is in that
context that the campaign on behalf of Holocaust victims and their deposits assumes an unexpected and unanticipated, but very timely, global
importance. That is why Washington has taken the rare step of supporting a minority campaign by threatening to freeze Swiss assets in the U.S.
unless its banks placate their critics. Switzerland cannot, in other words, be allowed to remain outside the Club. That is why the Swiss are
understandably alarmed, because bankers rely upon reputations for honesty and fairness and a campaign that attacks Swiss banks on moral issues
can be deeply injurious.

Therefore, the overall role of gold in the world economy today is even more important than ever before as a growing threat to the rulers of a paper
empire.

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FACTORS AFFECTING GOLD PRICES

1. GOLD v/s CRUDE OIL

The objective is to find the relationship between the monthly gold prices and crude prices movement. Crude prices can be seen as an important factor that
affect the prices of gold. The factor with which crude prices and gold prices are linked to each other is inflation. Crude prices can drive the inflation in the
economy. It has been observed that higher crude prices lead to higher inflation. Since crude is a very important production input for the industry, thus
higher crude prices is not only responsible for contributing to inflation by itself but it also increases the production cost of other industries as well. Now gold
is considered to be a good investment tool for hedging against inflation. Therefore, Gold prices should be influenced with the movement of crude prices.
The objective of analyzing this relationship was to measure the strength of their connection and finding out by how much the price of crude will impact the
prices of gold.

It was found that crude prices and gold prices are positively correlated with each other. Higher crude prices drive the inflation in the economy by not only
increasing in the production cost but also increasing the logistics and transportation cost. Since Gold is considered as a safe haven asset and a good hedge
against inflation therefore the prices of gold also goes up. Crude is also used in the gold mining activities. Crude is an important input which is utilized in the
heavy mining machines. If the prices of crude fluctuates then the cost of mining gold will also fluctuate and the resultant effect either an increase or
decrease will be reflected in the prices of gold. Therefore, any rise in the crude prices will lead to higher production cost of the gold which will drive the
prices of gold up and vice-versa.

Figure 1.1

Gold Crude Oil

Figure 1.2

In figure 1.1 the correlation coefficient of gold and crude comes out to be 0.75 which is moderately high. This gives us a statistical proof that there exists a
positive correlation between gold and crude prices.

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We went ahead further to quantify the relationship between the two commodities. In figure 1.2 we did a regression analysis.

Regression equation:

Y = a + bX

Where a is constant and b is Beta coefficient

In this analysis the regression equation is given by:

Y = 66.93 + 12.56*(X)

Where,

Y = Gold Prices, X = Crude oil prices

Since Beta is 12.56 therefore for every $1 change in the crude price, there will be $12 movement in the gold price in the same direction.

R square is the percentage of change in gold prices due to change in crude prices as explained by the regression line. Higher the R square value, better will
be the relationship. As a thumb rule an R square value of greater than 0.5 is accepted as a good indicator of the goodness of the fit of the regression line. In
or data above, we can conclude that the regression is a good fit.

2. GOLD v/s STOCK MARKETS

The relationship between gold prices and the stock prices have been studied a lot in the past. There has been studies and analysis in the past which says
that the stock market and gold prices will be negatively related to each other. The stock market’s good performance reflects the strong sentiments of the
market player. It gives out a good picture of the country’s economy and when the economy is doing good people invest their surplus in the stock market
however when the economy is in crisis and the markets are performing badly then people invest in gold as gold is perceived as a safe haven asset. We
started with this same hypothesis that gold prices are negatively correlated with the stock prices. The logic was that Investors have limited money to invest
in and at one point of time the investor will invest in one asset class only. Now when the markets are fuelling the gold prices will consolidate as the
investors will park their fund in the markets and the reverse also holds true i.e. during the time of economic uncertainties and a gloomy environment the
gold prices will soar when the markets topple down.

Figure 2.1

In the figure 2.1 gold prices and S&P 500 move in opposite direction till 2003. Gold prices and stock market rise in tandem from 2003 to 2008. The stock
markets collapsed in 2008 while the gold consolidated. Since 2008 both the asset classes rise in tandem till the year 2012 after which S&P 500 continued its
bullish run while gold prices fell.

For the period studied from 2000 to 2016, we cannot find statistical proof to justify our hypothesis. The correlation coefficient between these two asset
class was 0.45 which is low that shows it is difficult to establish the relationship between these two.

Our understanding of this paradox is that an investor today invest in both the classes together. An investor maintains a balanced portfolio nowadays. The
exposure to one asset class may get change on the basis of the performance of that asset class and other macro-economic indicators but he will keep
investing in both the assets simultaneously.

3. GOLD v/s DOLLAR INDEX

Dollar index is index of the value of dollar against a basket of currencies. The currencies included in this basket are the most traded currency in the forex
market. These currencies are Euro, Japanese yen, Pound, Canadian dollar, Swedish Krona and Swiss franc. This value measures the strength of the US dollar.
The objective was to find the relationship between the dollar index and the prices of gold.. An increase in the dollar index means the dollar is strengthening
against the basket of currencies while a decline in the currency shows that dollar is doing poorly against other currencies.

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Gold prices are computed in US dollars in the international market. Our hypothesis was that when there is an increase in the Dollar index there should be a
fall in the value of gold as lesser amount of dollars are required to buy gold now. And the impact will be reverse when there is a fall in the dollar index.

Figure 3.1

In the Figure 3.1 we could see that the movement of dollar index and gold is inversely related to each other. The correlation coefficient turned out to be -
0.65 which is greater than half way mark. We can establish the relationship that the dollar index value is negatively correlated with the gold prices.

Therefore our hypothesis holds true about the relationship that between gold and dollar index. When the dollar strengthens then lesser amount of dollar
will be required to buy gold and when the dollar weakens then more amount of dollar will be required to buy gold. Hence there will be corresponding
increase and decrease in the prices of gold.

Figure 3.2

In figure 3.2 we have tried to regress the relationship between gold prices and Dollar index. The slope was downward sloping which tells about the inverse
relationship between gold and dollar index.

The beta coefficient was -24.32 which means for every increase in the dollar index by 1 unit there will be a simultaneous decrease in the gold price by $
24.32.

The R-square value tells about the percentage of variation in the gold prices due to change in the dollar index. The R-square value turns out to be 0.41
which means that only 41% of the variation in Gold prices can be explained by the change in dollar index. The R-square value is not very high. We could see
that that at a high value of dollar index the gold prices does not fall beyond and at a low value of dollar index the gold prices does not increase beyond a
threshold limit.

It is difficult to predict the prices of gold on the projection of dollar index at the extreme level however in the middle range of dollar index it was possible to
forecast the prices of gold. Therefore the regression line is only useful at a certain level of dollar index, at the extremes the regression line becomes
meaningless.

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4. GOLD v/s REAL INTEREST RATE

Real Interest rate in the economy is inflated adjusted interest rate. The interest rate which is generally taken into consideration is the nominal interest rate.
The interest rate that we earn on our money is not the nominal interest rate but the real interest rate because with inflation the total purchasing power of
our money reduces. Therefore we subtract inflation rate from the nominal interest rate to get the real interest rate. For example if nominal interest rate is
7.5% and inflation rate is 5.5% then we actually are not earning 7.5% because the value of money is getting eroded due to the presence of inflation.
Therefore we will only earn 2% interest rate on our money which is over and above inflation. Thus nominal interest rate is of less significance if we do not
take into consideration the effect of inflation in the economy.

Our starting hypothesis was that Gold prices are inversely correlated with the real interest rate in the economy. In an increasing real interest rate regime
there can either be fall in the inflation rate or rise in the nominal interest rate in the economy. Good is a hedge against inflation, therefore when the
inflation is moderating the demand for gold should also come down and therefore the gold prices should fall. In the second scenario when the nominal
interest rate is increasing in the economy then it makes other investment avenues such as bonds and bank deposits more attractive to the investors and
investors will pool their money in these products. In a falling real interest rate regime, the reverse holds true. Due to rise in the inflation the demand for
gold increases because the currency loses its purchasing power and gold which is seen as the alternative of currency is invested into. Secondly, the as the
nominal interest rate starts falling in the economy then the attractiveness of other investment products such as Fixed deposits, bonds reduces.

Figure 4.1

In figure 4.1 we can observe that during the period starting from 2006 to 2011 there has been a consistent increase in the prices of gold. During this period
the real interest rate crashed because of the financial crisis. The demand in the economy came to a standstill and the economy was in a dis-inflationary
phase, there was many rounds of monetary stimulus announced by the governments, the interest rates were kept to minimum. This period was a time of
sustained increase in the price of gold due to low real interest rate.

Effect of Tapering of Monetary stimulus: The prices of gold reached its pinnacle in the last half of the year 2012 when the gold touched the price level of
$1800/oz. several times before spiraling downwards drastically after that. The reason for that was the tapering of the monetary stimulus by Federal Reserve
Bank. As a result of which the interest rates were pushed upwards. In this figure we can observe that the real interest rate has increased drastically from a
level of -4% in the year 2012 to the above zero level by the year 2016. As there has been an increase the real interest rate, the gold prices came tumbling
down which shows the strength of the relation between the real interest rates and gold price.

In our analysis the correlation coefficient turned out to be -0.56. The correlation value was negative which reinforces our hypothesis. When the expectation
of a fall in the real interest rate increases then generally people do not keep their money in banks but they invest in gold. On the other hand when the
expectation of a rise in the real interest rate increases then people take away their money from their investment in gold and they invest their savings in the
bank and also invest in interest rate sensitive assets like Bonds.

MULTIPLE REGRESSION ANALYSIS

In a multiple regression analysis more than 1 factor are taken into consideration to measure the impact of these factors on the Y variable. In our analysis we
wanted to find out the relationship between gold which is a Y variable and crude prices, Dollar index and real interest rate combined as X variables. The
shortcoming of multiple regression analysis is that only independent variables should be considered while carrying out the analysis. If the X variables have a
high degree of correlation between them then the results of the analysis can be incorrect. It is of no use of involving the two correlated variables in the
regression analysis as the behavior of one variable will be mirrored by the counterpart and therefore the results of the analysis will be distorted.

We plotted the correlation coefficient matrix of the factors below:

Gold Crude Real Dollar

Oil Interest Index
rate
Gold 1
Crude Oil 0.753963 1
Real Interest -0.56016 - 1
rate 0.55956
Dollar Index -0.64634 -0.8251 0.48565 1

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We found that the dollar index and crude oil have a high correlation of -0.82 which shows that dollar index is a common facto which influences the price of
gold as well as crude oil because both of these products are trade in dollar terms in the international market. Therefore both of these factors could not be
included in the multiple regression.

We omitted dollar index from our study as the combination of both crude oil and real interest rate best explained the variation in the gold prices and have a
higher R-square value than the combination of real interest rate and dollar index.

As per our analysis the R-squared value of the multivariate regression analysis was 0.6 and the multiple correlation coefficient was 0.77.

The regression equation was:

Y = 154.22 + 10.69X1 – 57.34X2

Where Y is the price of gold, X1 is the price of crude and X2 is the real interest rate.

A $1 change in the crude prices will move the gold prices by $10.69 and 1% change in real interest rate will move the gold prices by $57.

FINDINGS & CONCLUSION

We analyzed the factors that affect the gold prices in the international markets and came up with 4 main factors which are 1) Prices of crude 2) Dollar index
value 3) Stock markets 4) Real interest rate.

We found out that there were some factors which have a greater impact on the gold prices and some where we could not find any statistical evidence to
prove that their exist a relationship between that factor and the gold price.

Crude oil, dollar index value and real interest rates were found to be the factor which has a significant effect on the prices of gold. Through studying the
graphs and also finding statistically evidence we found a proof that these factors play an important role in determining the gold prices.

However we cannot find an evidence to show that gold prices are impacted by the stock prices. Although it is generally accepted that the stock prices have
an inverse relation with the gold, but from our study period of 16 years we could not establish that relationship.

REFERENCES
1) http://ijhpdindia.com/upload%5Carticle%5CPDF000012.pdf
2) http://www.acarindex.com/dosyalar/makale/acarindex-1423873750.pdf
3) https://www.researchgate.net/profile/Ruturaj_Baber/publication/236003986_Factors_Affecting_Gold_Prices_A_Case_Study_of_India/links/55435
6940cf234bdb21a4d77.pdf?origin=publication_detail
4) http://iosrjournals.org/iosr-jbm/papers/Vol8-issue4/I0848493.pdf?id=5194
5) https://fred.stlouisfed.org/series/MCOILWTICO

6) https://fred.stlouisfed.org/series/TB1YR

7) http://goldprice.org/gold-price-history.html

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APPENDIX

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