2.3 Gold Trading
Gold is a metallic element with the atomic number 79 and the symbol Au. It is a soft, shiny, malleable, dense and ductile metal which can be the most efficient measure of wealth and capital. Gold is a rare metal which used as money. On the world economic development in nineteen and twenty centuries, the gold standard system exerted a greater effect. Gold had valued by countries as a measure of base of exchange and wealth. World financial markets today are always affects by gold value and gold is expected to be the one of the safety trading options at present. Therefore, gold trading is extremely popular throughout history.
Gold trading is the most popular as an investment. ...view middle of the document...
Investors are usually invested in gold trading by buying gold as a store of value. Therefore, this can justified by the fact that gold is expected that will always maintain a store of value and investors will also always be willing to pay for it.
2.3.1 Determinants of Gold Price
i. Exchange Rate and Inflation.
Gold price is negatively correlated with exchange rate. When exchange rate increases, the gold price will decreases and vice versa. Gold is always priced in US dollars and fluctuated of exchange rate makes the price of gold sweet or sore for the investors. When the domestic currency is increase in value compared with the dollar, domestic prices become cheaper. Gold will become more valuable when the exchange rate becomes weaker. With the hope that gold can protect the value of their assets, most of the investors choose to buy gold for investment. Besides, the high gold reserves strengthen the national economies and act as a hedge against inflation. According to Fisher hypothesis, gold price should be uncorrelated with the expected inflation which is debunked by empirical evidence. Vice versa, a change in inflation expectations, such as announcement of futures CPI estimates, should be immediately reflected in the gold price.
ii. Behaviour of Central Banks
In “Washington Agreement on Gold”, the central banks of many countries with large gold reserves and the Bank...