Working Papers

Gold Price a Stock Rather than a Flow Equilibrium

With the nominal US dollar gold price posting record highs, I have an op-ed in today’s Age discussing the role of central banks and exchange rates in the determination of the gold price.  Gold is a stock rather than a flow equilibrium and central banks command a large share of global stocks.  However, exchange rates also have a large influence on the local currency returns to gold:

US dollar weakness has a positive valuation effect on the US dollar gold price, in the same way that it makes oil more expensive in US dollar terms. While a rising US dollar gold price is seen as symptomatic of a declining US dollar, this is true of US dollar commodity prices more generally.

Like other commodities, gold’s gains look less impressive in terms of currencies other than the US dollar. The Australian dollar exchange rate is positively correlated with the US dollar gold price, so that gains in US dollar terms are usually offset by Australian dollar appreciation. For an Australian investor, gold may be a good hedge against Australian dollar weakness, but actually increases exposure to US dollar weakness.


posted on 17 November 2009 by skirchner in Economics, Financial Markets, Gold

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Loved your comment on the IMF.

There is a great comparative study to be done on the IMF, public broadcasters (such as the ABC) and the Department of Defense as showing similar organisational pathologies, despite very different alleged accountability procedures, tasks and selecting belief structures.

Posted by Lorenzo  on  11/17  at  11:48 AM

My understanding of the RBA gold sales was that they recorded the gold on their books at $35 per ounce and then sold it at market prices. They then replaced the gold (at cost) with T-bills and paid the ‘profit’ to the government as a dividend. While I accept the argument that gold doesn’t earn a return and all that, the sleight of hand made me uncomfortable at the time.

Posted by .(JavaScript must be enabled to view this email address)  on  11/17  at  09:54 PM

Yes, all the RBA’s trading profits go to the government as a dividend, after deducting their expenses, but I don’t see that as a problem.

Posted by skirchner  on  11/18  at  09:35 AM

I’m no gold bug, but why is global gold production falling while the gold price (the USD gold price at least) rising rapidly?  Surely there’s huge incentive to get more of the stuff out of the ground.

Some are even talking about peak gold which I just don’t get.  Its not like we’re short of gold with so much of it locked up in vaults not doing much.

Posted by .(JavaScript must be enabled to view this email address)  on  11/18  at  10:58 PM

OT: Macro Man: The Fed And Bubbles.

MM asks the question:

Still, if Kohn’s claim that “our abilities to discern the “correct” values of assets is quite limited”, how can the Fed fail to recognize that Nasdaq 1999-2000 was a bubble…as was the 2003-05 housing market…and oil last year…but that a less than 10% decline in the value of the S&P 500 in the first few weeks of last year was sufficiently worrisome that it merited a 75 bps inter-meeting cut a mere 8 days before a regularly scheduled FOMC policy decision (which produced a further half-point cut.)?

Put another way, why does the Fed feel powerless to identify bubbles in real time, but is evidently highly confident in its ability to determine when asset prices have fallen below equilibrium?

Posted by .(JavaScript must be enabled to view this email address)  on  11/19  at  08:18 AM

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