The impact of monetary policy on gold price dynamics

Abstract

Ever since the collapse of the Bretton-Woods system, gold has retained its function as an important monetary commodity (Baur and Lucey, 2010), and continues to provide important inflation forecasting information to monetary policy setters (Tkacz, 2007). However, Capie et al. (2005) highlight the instability of gold price dynamics through time, attributing it to unpredictable political attitudes and events. In this paper, we investigate gold price dynamics under different inflation regimes and stock market conditions using UK and US index-linked Treasury bond data. We show that gold lost its role as an inflation hedge after May 1997 in the UK, and after 2003 did not act as an inflation hedge in the US, supporting the argument that gold is an inflation hedge only in periods of high inflation and inflation expectations. Further, we show that gold retained its safe haven status throughout the sample period in both countries, but it did not act as a stock market hedge in the UK except during the 2008-9 global financial crisis. Finally, we conduct an event-study analysis of the impact of QE announcements from four leading central banks on the gold price in US dollars. While the QE announcements of the US Federal Reserve and the European Central Bank exerted a strong and weak influence on gold, respectively, the Bank of England and the Bank of Japan's QE announcements had no discernible impact on the gold price.

Structural Changes of the 21st Century and their Impact on the Gold Price

“…The period of interest Q2, 2000 to Q3, 2017 was characterized by the global financial crisis that saw several states look to monetary policy (increased liquidity of financial institutions) as a solution, from which, stems our consideration of quantitative easing. As the literature suggests, the impact of QE on the gold price has received little attention, with the most noticeable exception being that of Zhu, et al (2018), in which an event-study analysis of the impact of QE announcements was conducted. It is worth noting that this study is however, not primarily concerned with QE announcements (which has short run effects), but rather deliberated on actual QE.…”

“…Whereas Batten, Ciner and Lucey (2010) found that between 1985 to 2012, there was no correlation between gold and the US CPI viii . The ambiguous relationship was best summarized and put into context by Zhu, Fan and Tucker (2018), who asserted that "once investors take into account the transaction costs associated with buying and selling of gold, they may decide that trading in gold is not worthwhile, and will stop treating gold as an inflation hedge".…”

“…While QE effects are similar to other general discussions of expectations and inflation, QE is unique as the central banks of several economies ventured on a large scale through unconventional methods to increase the liquidity of financial institutions in response to the great recession of 2008/09. QE, being a relatively new phenomenon has resulted in a significant outpouring of literature (Ugai, 2007;D'Amico & King, 2010;Krishnamurthy & Vissing-Jorgensen, 2011;Joyce, Lasaosa, Stevens and Tong, 2011;Neely, 2011;Wright, 2012;Zhu, Fan and Tucker, 2018). Such increase in liquidity, based on traditional theory, should have resulted in high inflation rates.…”

“…However, the findings of Joyce, Lasaosa, Stevens and Tong, (2011), came to the opposite conclusion. The impact of QE on the price of gold has however, received little attention with the most noticeable exception being that of Zhu, Fan and Tucker (2018). Zhu, et al conducted an event-study analysis of the impact of QE announcements.…”

Gold Extraction from Cyanidation Tailing Using Microwave Chlorination Roasting Method

“…Gold is a kind of precious metal, and its ductility is the highest among the known metals. In modern life, gold is mainly used for international reserves, jewelry decoration, industrial, science, and technology application [1][2][3]. In some countries, gold is the standard for currency trading and used for making coins and jewelry.…”