Abstract:
Since the establishment of the "two-tier" market in 1968 the price of gold has fluctuated between a minimum of $35 per fine ounce and a high of $230 per fine ounce. The market forces causing this fluctuation in price are many and varied. In order to obtain an understanding of these forces, it is necessary to consider the supply and demand for gold. The supply of gold can be broken into four sources: newly mined South African gold, Russian sales of gold to the West, Official gold sales and other world production. The demand for gold can be analysed in three sections: Investment demand, Monetary demand and Industrial demand. By analysing these various categories of supply and demand, it is possible to determine what factors influence the gold price. Typically these factors relate to the strength of the U.S. dollar in which gold is priced on the world markets. The inflation rate, public confidence in fiat money, politico-economic crises and the volume of world trade all contribute to the price of gold. By careful selection of available indicators many of these factors can be quantified. For example, the U.S. Consumer Price Index can be regarded as a measure of the strength of the U.S. dollar and the inflation rate in the U.S. By using statistical techniques it is possible to derive mathematical relationships between the indicators and the gold price. From these relationships it is possible to derive a number of forecasting equations. This report analyses those factors influencing the gold price and presents two equations with six month forecasting capabilities.
