Working Papor No.

150 Intarnational Gold Price Novemcntn, 1972-1982

I .S.

Gulati nnd dshoka Hody

Centre for Development Studies Ulloor, Trivnndnun 695 011 Qctober 1982

TIJTZRNATIONAL GOLD PRICE M O K 3 I E M E N Y ! S ,

1972

- 1982

During t h e l a s t decade, t o l a r g e 2nd r a p i d p e r t i c u l a r l y s p e c t a c u l a r speeds

decndo.

h a s shown proneness h a s changed a t

id

the l a t t e r h a l f of the

T l ~ od o l l a r p r i c o of gold''ncrunood

i-

moro than o i c h t

times from a low of about 5 100 an' ounce i n t h e summer of

1976 t o a h i g h of 8 850 i n Januar? 1980.

I

I n t h e following

e i g h t e e n months ending i n June 198$, t h e , p r i c e d e c l i n e d t o l c s a than

$

700 an ounco,

i.0..

t o almost one-third

o f tho

peak reached i n January 1980.

~ecbntl~ between , J u l y and a mini-cycle, first

September 1982, gold p r i c e undenie r i s i n g from 8 300 t o 8 500 an

and t h e n d e c l i n i n g t o

S 400.
I t x i i l l be r e c a l l e d t h a t pe$cen

I934 and 1968 @ l d by t h e e f f o r t s of a t t e m p t s a t conabandoned

p r i c e was mzintained a t S 9 n a t i o c a l monetary t r o l l i n g the

an ounce; on t h e p r i v a t e market. g , d p r i c e w a s l e f t t o f i n d
i t s own l e v e l .

I n August 1971, thg two-tier system w a s a l s o

I

i t
-1
I.

abnndcn~d. The United S t a t e s r o f d e d t o convert oven o f f i c i a 1 holdings of d o l l a r i n t o gold a t 3 35 an ounce. The

o f f i c i a l gold p r i c e ceased t o e x i s 4 ( e x c e p t f o r some aocounti n g purposes), and though n a t i o n a l monetary a u t h o r i t i e s have

ccntinued t o buy and se;-

gold, no attemp:has

by then t o keep t h e f r e e mark defined i i m i t s . I n t h i s paper; t h e decade 1972

Ir

been

made

p r i c s of gold w i t h i n well-

gold p r i c e movements

den^

- 1982,

period a f t e r t h e abandoning

o f t h e two-tier p r i c e

1971.

The decade,

w o havo :lndicntod,
The f l u c t u a t i o n s o u t two p r i n c i p l e c y c l e s

i n gold price,
p r i c e traced t h e decade. Moving up from

..

1971, i t reached a peak t h i r d riunrtcr of 1976, which i t f e l l up t o

b e r 1974, then f e l l till the e a r l y 1980, a f t e r we s h a l l be concerned

priiuazily w i t h t h e s e two c y c l e s , we shall a l s o i n d i c a t e haw t h e r e c e n t mini-cycle between June and September 1982 could
be explained i n terms of our d a l y s i s of tbe decade immediatc-

l y preceding. S e v e r a l developments i n b o r l d economy could have influenced movements i n gold p r i c e .

I

Our study, however, has

l c d t o conclude t h a t t h e gold p r i c e c y c l e s i n t h e last decade +rere generated p r i n c i p a l l y by s p e c u l a t i v e behaviour.

I

The s p e c u l a t i v e behaviour, i n t q r n , was influenced by c y c l i c a l

f o r c e s i n t h e world economic sydten.

Xowever, a s rue s h a l l notel ..

3

an e a r l i 6 r s t u d y , i'.~

covering

much more extended period, ind,cates

1

t h a t gold p r i c e has,

, no-t q u i t e responded t o c y c l i c a l economic forces.

During t h e decade under review,

i n t e r n a t i o n a l economic developmedts, d i r e c t l y o r i n d i r e c t l y , seem t o have had an impact on goljd price.

e r t a i n s p e c i a l f e a t u r e s of

The paper i s , thoreforo, organisod

as follows:

In

s e c t i o n I , we h i g h l i g h t t h e n d j o r changes i n t h e world cconony d u r i n g t h last ~ decade. S e c t i o n 2 a t t e m p t s an andysie

of the p r e s e n t i n t e r n a t i o n a l gold markct and assesses t h e r e l a t i v e importance of t h e v a r i o u s major supply and demand factors.

I I on p r i v a t e invostmcnt S e c t i o n 3 concentratps

I dal~i~intl f o r gold ao d i o t i n c t rrLIn .tho domnncl f o r jowollcry,

' d e n t i s t r y and i n d u s t r i a l ~ u r ~ c ' : : e s .I t i s i n this s e c t i o n
. ,,

t h a t wc d i s c u s s t h e r o l e o f sp,!?culation. which f o l l o w analyso t h e impac cnciric bpcculntion i n gold.

T t o f,actors wodiscuss are

I,
I I
I

The t h r e e s e c t i o n s

of f a c t o r s p o s s i b l y i n f l u -

i ) inflationary'expoctations, i i ) oxchosge r a t e f l u c t u a t i o n s and i i i ) i n t e r e s t r a t e s changes. Gold p r i c e movements betThe

ween J u l y and Soptenber 1982 a i e nnalysed i n S c c t i o n 7. p r p c r ends with soma concludin4 /obscmafions. S e c t i o n 1 : The i n t e r n a t i o n a l ' e h ~ r o m e n t The following f e a t u r e s t h e d e c d c , 1972
1)

world economy during

- 1982,

are d e c c l e r n t i o n i n world pm-

There was

dlmost s t c a d ( ~ e c

d u c t i o n and t r a d e .

This was a c c o n p d e d by

i n c r e a s i n g unernploymcnt rate$. employment r a t e doubled from

n. t h e OTCD c o u n t r i e s un-

5.3 p e r cent i n t h e second

c t e d t o i n c r o a s o t o 8 por als 0 i n production ~ . s ~ a c c o n ~ a n i . e b? d r i s i n g i,nfl.ation. The I' I nvcragc i n f l a t i o n r a t e increased t o 6-40. p e r c e n t i n 1970s from 3-4 p c r cent i n t h e 1960s.

2)

There was a t t h e s m e t i m , a l a r g e growth of the Total o u t i b d i n g i n t e r n a t i o n a l b &

finan-

c i c l superstructure.

claim

grew ct 25 per c e n t per onnuxr:

-.ts.

5 gross terms i n t e m a t i o n d b d I I? increased from about 8 ! l g + S l l i o n on 1970 t o more

I

than S 1500 b i l l i o n i n early 1 j 8 f j a d i n not terms (i.c., n s t of i n t c r bank transactions)' ??om about 8 100 t o about
8 I000 b i l l i o n over the same p

I/
Ii

"

3)
::rc:~tor finnncinl i n t e r e s t r a t e s and exchmge.

w a s accompcnied by

i n volntile from a

z h a g e r a t e s , p a r t i a l l y i n 1971 The v o l c t d i t y of exchange r a t e s ; p a r t l y r e f l e c t e d f i n n n c i d

s :>cculation.

1,.

I t r l s o 'refl-.cted varied national growth p e S

Moreoveisthe higher i n f l a t i o n r a t e s i n

forccnces and policies.

thc 1970s were acconpmied by g r e a t e r v o l a t d i t y i n national i n f l c t i o n r a t e s a s well as zreate'r divergences between national i n f l a t i o n rates.

4)

OPEC, tho c a r t e l formed by the mnjor pctroloum pro-

duccrs, c f f e c t i v e l y demonstrated i n 1973-74 a d i n 1979-80 i t s a b i l i t y t s enforce substeiitiol dibcrote increases i n t h c nozinc1 price of i t s pctkoleum exports and:'thcreby achicve considerable improvement i n i t s t b m s of trsdc.
S e c t i o n 2:

The g o l d marlcet

I t has been estimated that' the cumulative aggregate

of ~ a l d ever ninad would i~robnblybe i n the range of 90,000

t s 116,000 tons.

Of this oggr6gaqej lrnore t h e n 60,000 t o n s

a r e p o s s i b l y a v a i l a b l e today i n t $ e l f q n of o f f i c i a l and p r i v a t e h o l d i n g s of bullion,, gold

jewellery,

Approxi-

mately h a l f of t h e a v a i l a b l e stock,j$.e. , .

about 30,000 tons,

i s h d d i n Lhe f o r n of rosorvcs by k h t i o n i t monotary autho-

r i t i o s . A/ Tbe annual new supply of gol'd i n t h e 1970 h a s been

i l l

tllc mngo of 1300 t o 1 GOO tons.

'

..I

Thc new' supply, thorn-

f o r e , forms l e s s than 3 p e r c e n t ofi e x i s t i n g aggregate s t o c k and about G p e r c e n t . of n o n e t k y d o c k .

I

The Russians produce

around 300 t o n s nnd t h e . Chinese about 50 t o n s every year.

':he

r e s t of t h e now s u p p l y comes from t h e non-communist counhns been producing I n r c c e n t yenrs, South ~ f r i c c

tries.

650-700 t o n s , which i s about 70 p e r c e n t of non-commdst 2roduc t i n n . Aggeg.=tc noii-connuni t.production has however r i m a r i l y on account o f

tended t o d e c l i n e over the 1970s,

,-. continuous f i l l i n s o u t h Africcn~product$olrf r p m 9 7 s tons

i n . 1 9 7 1 t o 650 t o n s i n 1981. Li/ O u r d i s c u s s i o n below r e l a t e g o l d narlret.

of gold i n t h e nonThe t0t.d annual sup I l g .

o n l y t o tho non-communi~t

c o s a u n i s t c o u n t r i e s f o r o f f i b i a l a h non-official u s e s i s obtained

rn t h e sun o:F c u r r e n t proguction i n t h e non-commu-

n i s t c o u n t r i e s and t h e n e t e x p o r t s / of t h e communist countries. T h i s aggregate, when .adjusted fo& b t f i c i a l t r m s a c t i o n s , g i v e s t h e m n u a l gold supply f o r p t + v a t e purposes.

o n tho demand s i d e , j d e l l o r y denand, though fluctuat i n g , has c o n s t i t u t e d most pf t h e ~ r i v i t e demand.

!

I n five

of t h e 11 years between 1971 / @d 1981~>~'-5;bF3~:y demand was a r o u n d 1000 t o n s , which workid. out t o 80 p e r cent o r more of t h e a v a i l a b l e supply f o r bxkvate uses.
I I

The demand for

jowcllery, howover, f e l l t o &I l o w as 120 tons which was 15 p e r c e n t of a v a i l a b l e supply.

i n 1980,

Between 200 ~d

250 t o n s have each year been taken up by d e n t i s t r y and in-

d u s t r i a l 'uses. holdings.

The r e s t has gone i n t o c o i n s md b u l l i o n tho d m r ~ l d '

The l a s t category of demand, i.e.,

f o r bullion, i s derived a s a residual. F o r t h e Furposes of o y r a n a l y s i s we r e f e r t o the demand f o r jewcllery, d e n t i s j r y and i n d u s t r i a l purposes m c o n s t i t u t i n g t h e c u r r e n t con$umption dcnmd f o r gold, and tho demand f o r c o i n s x d ouldion a s c o n s t i t u t i n g t h e investment demand f o r gold.

I n the c h a r t s t h a t fol'low gold p r i c e has been p l o t t e d a g a i n s t gold s q p l y and Here, as i n ' f u r t h e r d o l l a r s ) has been of manufactured
n )

demand components.

( expressed i n US
p r i c e index on US d o l l a r

i r , ordo? t o
from i n f l u changes i n t h e US trends.

isolate factors ences on gold p r i c e d o l l a r oxchange r a t e o r

The

nanufactured e x g o r t s p&ce i n d e k (has Geen used as an i n d e x of general: i n f l a t i o n a r y t r e n d s j;b 'the =dc:cste+cXn,p r i c m i n the manufactures cecto:[set 'other s ectors.
. t mny bo 5ben t h a t c y c l i c a l rnovc~nonts From c h a r t 1 j

taat

the pace t o p r i c e s i n

i n gold p r i c e can be explained neithe;.

I

by v u r i a t i o n s i n aggrepurposes, nor by The c u r r e n t

g a t e supply f o r o f f i c i a l and non-officinl

t h o v a i a t i o n s i n t h e supply o n l y t o t h e l a t t e r . c o n : ~ r v ~ l ~ - iLrmancl, on L.o.

tho dC~nn*i f o r Jorollory, d o n t i ~ t r y

price and i n d u s t r i a l a s e s , i s a l s o unpblo t o e x p l a i n g ~ l d

611an&cn.

( s e e chart

. ..

z.),

Indeed, . .t h . e r e appears t o be an

i n v e r s e r e l a t i o n s h i p between c o n s y p t i o n d e m a n d and r e d l gold p r i c e , which i n d i c a t e s thn$ go12 p r i c e i n f l u e n c e s t h i s demmd r a t h e r t l ~ %5ce n versa. Thd demead f o r b u l l i o n alone, urhich:.as i n d i c a t e d above .. I i s dorived a s n r e s i d u i l . , seensJ;to follow t h s curve of t h e

1..

ro?-1 gold p r i c e reasonably welij.

Moreover, if t h i s demmd

i s e q r e s s e d as a p r o p o r t i o n of t h e supply t o t h e non-commu-

n i s t p r i v a t e s e c t o r , t h e r e appegrs o vary c l o s e correspondence . . 'bctwccn t h e d i r e c t i o n of t h e yekr-to-year movements 6 $ gold

p r i c e end t h e demznd f b r bulliop., ( s e e ' c h a r t ' 3.) .

,

If t o b u l l i o n demand we
ZLLIEJ

i:o r u p r o : , ~ n . t tho ngcrogatd ( l i w o o t m o n t clommd f o r gold, almost completely i n s y m ( s e e c h a r t 4.)

fid t h e demand f o r o f f i c i a l

rSrc f i n & t h a t t h e gold p r i c e pethy w i t h t h e i n v e s t i e n t

I t , there-

f o r * appears t h a t gold p r i c e dlu*i!ng t h e l a s t decade has been

determined p r i m a r i l y by changes i n investment demand. S c c t i o n 3: Investment demand f o r aoid

Often investment dem4d i s t h o u g h t t o c o n s i s t of two components: a s p e c u l a t i v o demand ( i n e x p e c t h t i o n of a (relat i v c ) p r i c e r i s e m d honce a c a p i t o l gain) and hedging dcmand ( a l s o i n e x p e e t e t i o n of a ( r l a t i v e ) p r i c e r i s e but more with a view t o p r e v e n t i n g a l o s s t i . c u l n r l y c u r r c n c i e s ) hcld) t h e r e a l x v a l u e of a s s e t s (par-

. Following Machlup,

however, W c

r c g a r d dl of investment den&d
1

f o r gold as s p e c u l a t i v e i n

n a t u r e r e g a r d l e s s o f whether r i s e of gold o r of other assets. of gold i n

tb

i n s u r e ag According

t is i n anticipation of price
expected l o s s i n t h c value . .

"...

any purchase

i n i t s p r i c e s h a l l be buyers of gold, seekdo n o t r e g a r d thema n a l y s i s it makes

no difference whether a

e r w a n t s t o avoid l o s s from he seeks c a p i t a l g a i n

thc d e p r e c i a t i o n of
from tho

1969, pp 333 nnd

F a c t o r s a f f e c t i n g speculation:
WL)
1 1 4 ~ 0 lill:l.[:

IIuu11

&~!.d/jll!i00

111

t11tI

lL1Uk ~ U U ~ L11U ~ O

been determined m a i n l y by i n v e tmont demand f o r gold which,

as w e have noted, i s aitogetbbf s p e c u l a t i v e i n nature.

'I

hat

t h e n r a i s e s t h e f u r t h e r question: what a r e t h e f a c t o r s in-

flucncing speculative demand foa gold? I n the current int e r n a t i o n a l economic environmen
;

gold pribe nay be expected

to. r i s k when:
, ,
,

a) i n f l a t i c n a r y &pectations are generated

, , ,

...

on acco&t df r a p i d l y f l u c t u a t e rapidly.
OP b01;reciation i n
%.

and bf.'&change - r a t e s creates an expectation

Tho socond reourroncios ~nvironment. flwitua-

fl.ecto &cortrrinty
xell a s general Higher
.

-tion3 may, therefore, be oxpcct out of currencies

..

.torosdt'
,;,

i n somo movcrnont

Such moveme
!

rgreiter investment. demand f o r ,ggid, O n the other hand, since1

'

4; roisik

out would, i n . part, create the gold 'price.

J Y

is a non-interest bear-

i n g a s s e t , l a r g e increases ' i n i~ e r e s t rat'es may be expecth'

t i discouragi holding o f gdlk/'

respect t o the appreciation i n
influence on gold price

\iyFn
o: price
1 !

t h e expicta~iom3 W

i t i

o f gold.

I n t h e following nectiongL r e , therefore, diScusQ t h e

.
,

..

expobtations, unax@ i n t e r o a t r a t e s

c e r t a i n t y i n the c!-,ages:
. ..

I n discussing changes) i n i n t e r e s t r a t e s , we also

got some clues t o understanding/ the c y c l i c a l behaviour gold price.

bf

How do t h e r a t e of inflaltion nnrl the i n f l n t i o n a r y

cspcc+tions. r e a c t on the inve$ment

,.(. . .
:

denand f o r gold?
.

This

I s - h e questisn t o irhich t h i s dection is- addressed,

.ABS&~

t h a t inflationary
. .

on the r a t e of p r i c petroleum

i n c r e a s e i n t h e previous

p r i c e i n c r e a s e s s i n c e t h e s e havc s i g n i f i c a n t l y c o n t r i b ~ t e d t o i n f l a t i o n a r y e x p e c t a t i o s i n t h e last decade and then

l o o k i n t o t h e o v c r d l i n f l , i o n r n t c s , a s reflected i n tho

movements of t h e p r i c e indq Petroleum p r i c e

.. I n c h a r t 5, r e a l

1 Ii I
I

of mmufacturod exports.

has beon p l o t t o d agninst p r i c e i n t h e previous

I

t h e r a t e o f i n c r e a s e of y e a r . I t w i l l be noted and t h e r a t e of move i n t h e same

,

o f y e a r s gold p r i c e petroleum p r i c e
.

correspondence is from c h a r t 6

n o t complete.

which h a s been observations. t h e a c c e n t u a t i o n of ;the uptbend i n gold p r i c e .

than annual)
"explain"

1:

They do not, T h i s is
SO

however, "explain" t h e m t of t h e uptrend.

parti-

c u l a r l y f o r t h e upward phase of t h e second c y c l e s t a r t i n g

A

1:

towards t h e end of 1976.

Petroleum p r i c e rcmnined stoady

nl

i n nominal terms and Peclinbd i n r e d terms as gold p r i c e began t o move up. Qonprnl i n f l a t i o n I n c h n r t 7, r e d l g o l a p r i c e i s ~ l o t t e d a ' g a i n s t the r a t e of i n f l a t i o n ( r a t e of o f s a n a f n c t u r e d goods) i n owth of t h e e x p o r t p r i c c index previous year. The r a t e o f

i n f l z t i o n i n t h e p r e v i o u s . y e a r Dhow3 a c l o s e r e l a t i o n s h i p i n d i r e c t i o n a l movements with t h e r a a l gold pri'ce.

I& p a t i -

c u l a r , t h e two curves t r a c e o u t t h e s , ~ m c ' c ~ c l ' c s .However, , t h e r e l a t i o n s h i p fails t o hold in. 1979-80;. The l a r g o r i s e

i n 1979-80, ?re f i n d , was r e l a t e & n o t t o t h c g e n e r a l i n f l a t i o n

rc1.L~but t o i n f l a t i o n a r y o x p c c t ~ ~ / t i o nb~.ood n on t h o ohnrp r i s o

i n p a r t i c u l a r commodities .of c ~ $ ! t i c a linport'ance, such as

petroleum (which was discusse$ jabovo) and food (#ee chart 8 ) .

The i m p l i c a t i o n s of t h e /o,bscrved r o l n t i o n s h i p betwoen g e n e r a l i n f l a t i o n and gold p r i c e ~ h o u l d bc noted. I n an

iy-

f l a t i o n a r y period, the r e a l gold p r i c e has tended t o incrcase. But the r e d gold p r i c e i s thD bbminal gold p r i c e d e f l a t e d b y t h e p r i c e index of manufactubbd e x i o r t s , which i s a l s o
t h e indcx wo hava uscd to n c a n e c genoral i n f l a t i o n .

Thua

i n an i n f l a t i o n a r y period, che l n ~ m i n dgold p r i c o has tended t o i n c r e a s e f m t u r than g e n e r a l rlnflation, i.e. in,r powcr of gold h s E a r l i e r exuerience t h e purchas-

increased.

I t i s worth n o t i n g at th'is p o i n t t h a t tho u p w d movcmont of r c d gold p r i c e during a poriod of boom i n prices i s , h i s t o r i c a l l y speaking, n new de,vclopment. Jastram, who hm

s t u d i e d t h c h i s t o r y of gold pri,ce Setwecn 1560 and 1976, h a s

cnnrl~irlorl:

"To r e p e a t , t h e evidence i s convincing

...

when i n f l a t i o n s e t i n , t h e purchasing power of gold declines"

172).

"

...

gold i s n o t a s a t i s f a c t o r y hedge

ngains t i n f l a t i o n ( b u t does very woll i n period of d c f l a t i h n )

..."

, ( p . 178).

prico According t o J a s t r a , goldfhask i n general, n o t matched t h e c y c l i c a l swings i n p r i c e s . ~vbihg t h e upward phase of a During t h e

> r i c e c y c l e , gold h a s l o s t i t s purchasing power.

riufln'tionnry ph:.~zc, gold h a s continuod i t s otoady r i s o md iho c a i ~ g l l tup, s o t o say, w i t q g e n g r a l p r i c e l e v e l , t h u s m&nt a i n i n g i t s purchasing po*er over a c y c l e and i n t h e long run. However, J n s t r a n himself n o t e s a d e v i a t i o n from this

b&-zviour i n t h e f i r s t h a l f of t h e 1970s ( ~ a s t r a 1976, , p.

1721, when gold i n c r e s e d

it* purchasing power in. an in-

f i?.$ion,?.ry phcse.

O u r findirgw , covoring the whole decade

~3

of .the 1 9 7 0 ~ show ~ that

p q t t e r n of the first hdLf of a e

s e v e n t i e s h a s continued i n t o t h e second h a l f . The r e l a t i v e l y new phdnoacnon of redl gold p r i c e ris-

ing i n a period of c y c l i c a l upswing i s due probably t o t h e

growth of t h e f i n a n c i a l s u p e r s t l l u c t u r e ( r e f e r r e d t o i n tho f i r s t s e c t i o n above). Ploreover, i t c m o t be overlooked that

i n f l a t i o n i n t h e s e v e n t i e s h s cb-existed w i t h d e c e l e r a t i o n i n prodnctive a c t i v i t y , n phhonobbnon ofton r o f o r r o d t o ns stsgflation. Could i t be t h a t s p e c u l a t i v e investment i n gold

o f f e r s h i g h e r expected- r e t u r n s ich,ul productive ' a c t i v i t y in such c i r c u n s t a o c e s ?

S e c t i o n 5:

Exchange . r a t e behaviour

A f t e r t h e Second Worlp War, t h e US d o l l a r emerged as t h e n o s t important i n t e r n a t i ! o n d l currency.

The d o l l a r ' s domi-

n z n t p o s i t i o n ,?rose p r i n c i p r l l y from t h e s t r e n g t h of t h e U S

cconomy:

it3

l a r g o 3hnre i n world production a d t r a d o , i t o

r e l l - d e v e l o p e d f i n a n c i a l markets nnd i t s s t a b l e p r i c e level. Also, t h e f i x e d exchange r c t e system t h a t w n s h a m e r e d out a t B r e t t o n Woods accorded t o t h e US d o l l a r t h e r o l e of t h e

orio r n d only ro:lorve

currency.

I n , t h e 19508, d o l l a r s a e c e s s a r y f o r . f i n a n c i % .forld t r a d e lrnd f o r b u i l d i n g up i q t b r n a t i o n d r e s e r v e s were i n s h o r t supply. However, w i t h $he I T S oxporting a l a r g e m o u n t

o f long term c a p i t n l nnd l n t b k running l a r g e c u r r p n t account

d e f i c i t s i n a d d i t i o p , dollhri bdiances o u t s i d e t h e US grow r z p i d l y and by t h e mid under pressure.

The US few. i t s monetary gold s t o c k deplet-

"&t

,the

d o l l n r begcm t o come

i n g i n i t s attempt t o maintn5.h t h e gold vnlue of d o l l a r

(& 1/35th of an .ounce).

Ih :I971* t h e r e f o r e , t h e US suspended

d o l l a r c o n v e r t i b i l i t y i n go13 nnd a l s o devalued t h o d o l l a r . I n 1973, t h e " f i x e d t 1 exchangh r a t e system i t s e l f was abnndoncd i n f a v o u r of t h e "flod$ingtr exchange r a t e sfstem (.under which n n r k e t f o r c e s , subdect t o c o n t r d banks1 i n t e r v e n t i o n from tima t o timo, dotornine t h e exchange r n t o aliments).

I t was o n l y t o be expectcd t h a t ~ 5 t h t h e f r e e i n g of
gold p r i c e and exchmge r n t e s , a s s e t p o r t f o l i o s of t h e c e n t r a l bnnlis md p r i v a t e i n v e s t o r s would chnnge.
A f i n a n c i a l port-

f o l i o nay be changed e i t h e r tb li!ncrese t h e expected r a t e of r e t u r n ( o r y i e l d ) . o r t o reld+dFthe riskinds of t h e expected yield.

A recent studyi q o w s t h ~ u ~ t ~ ! i e L s " t r u c t u r e

o f expected r e a l raturns of cUSltencies changed'.in the 19708

c r e a t i n g n strong incentive

$0

ldovo out 'of tho d o l l a r i n t o

o'l-iur c ~ ~ r o n c i o n m, d n l y ~ o u t c d d M:rl.I<, Jr.pmose Ycn ( s e e D,ornbusch, 1 9 k ) .

S w i m Prnnc and t h o
The share o f t h e d 0 l l a

i n the f o r e i g n exchange reserves of national monetary a ~ t h o * r i f i c s declined from 87 per cont i n 1976; IV t o 61 per cent i n 1980: IY. Over tho s m c period, thc share of t h o Deutche

IZark increased fro= 7 . t o 11 p e g c e n t , of the Swiss Franc f r o n 11/2 t o 3 p e r teat md of #he Yen from 1 t o 3 per cent. The share of ' t h e d o l l a r i n i n t e r n a t i o n a l lending declined
f r o m 74 per cont i n mid

- 1976

t o 65 per cent i n mid

- 1980. sl
Table 1)

l; Similarly, Kouri a

de: Mncado ( 1978,. p.122,

have estimatad that over c e r t a i n periods i n the 1970s gold rrould have had a higher r a t e

of

return than any currency.

Expectations based on such high r e n l i s e d r e t u r n s probably

n incentive t o d i v e r s s f y i n t o gold a d contributed created c

t o the s e c u l a r r i s e i n gold priice, cs soen i n tho higher peal< of the r e a l gold. price i d the second cycle. 9/ Egchanae r a t e s ' v o l a t i l i t y
UI.II: curl U X O I I L L I ~ ~ Oruko utovoaorrl;a t h r o w m y l i g h t on

tho c y c l i c a l movenants of gold: price?

Tp examine t h i s question
The mea-

we looked i n t o t h e fl.uctimtiods i n exchange rates.

s u r e of fluctuations. used wps the standard devintion of monthly

percentage changes in'efchange pbt t h e $/DN exdhmie r a t e .

."

3and i. t was applied t i

From ' ~ b b l e2 ' it may be seen that

the r e a l gold p r i c e has. incredshd. with increnSim3 exchange r a t e ,fluctuation$. . 'and . declined, +dthi'decriosing o x c h d g e

r a t c fluctmtion.g/

Tho exchdn44 r n t o fluctuations trnco

our the same cycles as the gold Idrice.

'

The relationship obserbeq (needs t o be explained.

On

t h e one hand, it could be argue4 [that r i s i n g exchange r a t e f1uctu.-.tiono croate an incentive lto diversify t h o asset p o r t f o l i o i n order t o minimise' rtiFk. Bccause of t h e heavy

concentration o f t h e d o l l a r i n aspet portfolios, diversification b a s i c a l l y implies a movemknt out of d o l l a r s i n t o e i t h e r other currencies o r i n t o kold. Thus i n a period of

increasing exchange r a t e fluctua$ion, the investment demand f o r gold riooc, and hence e;old p r i c e goes UpHowover, i t would d s o be noted f r o m ~ a b l e 2 that fl~ctutions i n r e a l gold p r i c e (estimated i n t h e sme W a y as exchange r a t e fluctuations) a r e consistently g r e r t e r thnn the exchwge r a t e , fluctuations.

I t , therefore, hardly

seems r i g h t t o srgue that, d i v e r s i f i c a t i o n out' of a r r e n c i e s

ir,t o g o l d i n periods of highly f luctuat.tfng exchmge r a t e i s

p r i n & i l y . a r i s k 'kininiising.mov

nt.

I t s h o u l ? bo poted i n this1 context t h a t though gold

p r i c e f l u c t u a t i o n s .have.heen..gre&;er than exchange r a t 9 fluctuations, the.twp. hnve tchded t o i d c r e m e md Secreme togcthsr.12;/

Thus, i t could be i n t e r p r e t e d th2.t the two s o t s

of fluctuchions a r e world economy.

indices of uncortointy i n tho

1 n c r e k e d G c e r t a i n t y creates g r e a t e r in~knce i n periods of high uncertainI

centive f o r speculation.

t g , as r e f l e c t e d i n the high fluctuations, the inves-t. dcaand for gold goes up atad; gold price, therefore, Mses.

To l i n k up with our brevious section i t will bo notbd

t h a t higher expectation of ' n f l a t i o n r a t e s has i n generd

hccn accompanied by g r e a t e r uncertainty, both re&~rdng t h e incentive t o i n v e s t i n !gold. I n 1981, howovor, oichnngo r a t ? i n s t a b i l i t y rose whilo i n f l a t i o n a r y expectations
..

Gold p r i c e f e l l , presu. of , laxer i n f l a t i p n a r y

s ~ . b l y ,under tho combined

expectations nnd high inted.est r a t e s which had raised the 02;lortunity cost of inveeti.lent i n gold.
.
,

The largo erchaaga

r a t c f l u c t u a t i o n s which. co xisted with t h e fall i n gold price

nnd i n f l a t i o n a r y dxpectntigns r e f l e c t e d v o l a t.i l e i n t e r e s t
% .

r a t e s and major
.

i n n a t i o n a l i n t e r e s t rates.

I n t h e next section1 we examine i n some d e t n i l the

influence of i n t e r e s t Section 6 i , , I n t c r e s t Since gold does terest rates, ceteris

oC ~ u l d
,

i3n

i n t e r e s t , a r i s e i n inthe.. .attractiveness .

of compnrnhlo liquuinoney mdket)

10.)
1

The chnrts

a r c 'quite striking.

1ns,je# if t h e inverse relationship t h a t

-reasonin& the may be expected from tlie : . ~ + v G c e t e r i s . ~ n r i b u s

two curves move rensonably p a r 9 l e l t o each other,. i n t e r e s t I his nay be see1 r c t e s showing the same c y c l i c 4 .tendency. p a r t i c u l a r l y f r o m chart 10 where .moving avorages have been
I

?lotted t o smoothen out temporby fluctuations.)

Only from

t h e first i u m t e r of 1980' t o t h e f i r s t quarter of. 1981 do ! inborest r a t o s ml gold prico move i n opposite diroctione. To explain t h e positive, c o r r e l a t i o n between i n t e r e s t r a t e s and gold p r i c e s , which held over most of t h e let decade ~rc nt&e a diereasion i n t o t h e kclationship botwoen business
1

cycles and i n t c r i s t rates. Sus.incss cycles and i n t e r e s t r a t e s

i
I

A t l e a s t a s far beck

'8% Marshnll,.

it w a s noticed t h a t

i n t c r o s t r a t e s are . positively dorrelatod with business mti. v i t y over m o s t o f a business c j y c l e i I ~ more rocent state- . ment has been made by C n g a n :
I,

...

a t f i r s t investor

' I look
I

favourably on

c a p i t a l projects despite the, accompanying r i s e i n i n t e r e s t r a t e s ; but i,f the r i s i n g

c o s t of c n p i t a l eventubily excoeds expected returns, the r e s u l t i *

I

'i

' T I reduction .

i n in-

vestment expenditure lcp$i.d t u r n i n business a c t i v i t y . downturn gathers morn+m$

I

!/I

bring a downThen ns t h e

I , buninoas proathe remanants

pects dim even

of optimism fade.

i 1nv.e b e n t undertakings

18'.

held back: ,

&dhigh
8

interest

r e t c s no .longer when r a t e s ' a r e i n demand f q r

even

t o r e s t . r a t e s w i l l dechine." (~&nn, 1969, pp 3-4.)

j'
i

..

To r e t u r n t o our bas& theme, it appears unlikely

t h a t the investment dcmmd f o r gold is l j r g e enough t o pull

i.r a t e s . up o r push'down t h e i n t e r e s t !
cst r n t c s md oconomic ,wtiyLty.
..

A more p l a u s i b l e expla-

nation seems t o l i e i n the 7 d . c positive l i n k between intorThat t h i s l i n k a l s o hold.

i n tho 1st decade may be seen.frdm charts 9 and lO,,where world trade has been used activity. The reasoning
i

3 8

a proxy f o r general-economic

as follows: a & e
increased the
I.

i n economic a c t i v i k y

&enand pressure i n the parkdts f o r good nnd services and led t o & acceleration of 'price&;. tws .. . .. raised i n f lationnry '&;

p e c t a t i o i ~ smd created h d the e f f e c t (as ;rice; increased

uncertainty, which i n turn of r a i s i n g the gold also i n c r e a e d demnnd f o r

funds, which l e d t o ' r i s i n g h t e r e s t r a t e s ; gold p r i c e and i n t e r e s... t r a t e s .urcro thus see$ t o r i s e together; on the downwad phase of t h e busin p r i c e f e l l as t h e demand p r mnrkcts respectively decline/dl.
'

1.

cycle, i n t ' e r e s t r a t e md gold w e i n t h e c a p i t d and good8

whilb t h i s
1980-81 there.

picture, i n

( ns meosur-

.ed by thc'.worla trade . . indeb) . . .ptngnatod a f t e r having g r o w only mnrginally'in. t h e pre?vibbq gear.
T h i s put a downword

p r e s s u r e on p r i c e s .

The codse'uent d e c l i n e i n i n f l a t i o n a r y gold p r i c e down i n any case.

\

e x p e c t a t i o n s would have pushe

I
I n addition, i n t e r e s t r a t e s ,

1
1

i c h nornially d e c l i n e ( w i t h a

s h o r t l a g ) a f t e r general ecqn4dic a c t i v i t y slows down, d i d n o t f a l l ; i n s t e a d thoy rose! d e s p i t e we& demand he r i s o i n i n t a r o s t r a t o s a s c r i b e d t o .,tho

e f f e c t s o f . t h e c u r r e n t US ecoh mic policy.

i t would appear t h a t h i g h i n t
0.C

71

I!
I

F o r our purposes,

e s t . r a t e s reinforced the e f f e c t
,,,

i.owor i a C l a t i o n n r y o&octntiona i n pushing down gold p h c c . Recent gold p r i c e movements !

S e c t i c n 7:

I n our d i s c u s s i o n t h u s f a r , we hcve not considered t h e i n f l u e n c e on gold p r i c e of p o l i t i c a l upheavals, w a r s , n a t i o n a l b a n k r u p t i c s , runs on banlrs e t c .

.
,

Such s p e c i a l events

clo i n f l u e n c e gold p r i c e m d sonetimos q u i t e considerably.

They bring i n a n a d d i t i o n a l element cf u n c e r t a i n t y nnd, tend the t o r z i s d g o l d p r i c e . Our j u s < i f i c a t i o n i n i g n o r i n g t h e s e

!

events i n e x p l a i n i n g t h pricd,movements ~ over t h e lnst decade l i c s i n t h a t t h e s e s p e c i a l ev ' n t s do not e x p l a i n t h e 10% term eold p r i c e movements; t h d i r i n p a c t i s of s h o r t d u r a t i o n ,
I

.i
,.I

'

however l a r g e mag be t h e immec)'iote nrgnitude of t h a t impact.

Such events o n l y modulate t h e k n d e r l y i n g movements of gold

price.

Thus, tha I r a n - I r a q c

d u r i n g the upward

phase

of gold p r l c o c y c l e p o s s i b l y croatod t o gold p r i c e sky-rocke't1980. On t h e o t h e r hand,

+I .

f r o n t a t i o h which broke up

an a d d i t i o n a l u n c e r t a i n t y a d , i n g t o $ 850 an ounce i n

t h e P o l i s h c r i s i s , which h a d * & l e a s t as much i n t e r n a t i o n a l

s i g n i f i c j n c e as- t h e . I r a n - I r a q c r i s i s , occurred during a p e r i o d w h m .gold p r i c e w c s .on !the downward . . phasb:

. .

although . .

t > e r e were some b l i p s i n the g o l d . p r i c c graph, no new record l e v e l s of g d l d p r i c e were keacbed.

It

13

n o t boing sug[;ost!od t h a t in, &.scu3sing

I ..('

long-

t e r n movements one can d t o g e i lei. i g n o r e e i t h e r ' t h e o f f e c t .I of s ~ c i e dv e n t s o r the sign$ficrmce of s h o r t - t e r n changes

ir,

gold p r i c e .

~ n d e e d ,s h o r t term chnrgcs necd t o bo studiod

carefully, b u t t h e i r s i g n i f i c

t h e fr'mework of b e s i c long t e q trends.

1Je noted a t t h e o u t s h t hhclt, gold p r i c e h a v i n g reached
, n s o r t of trough .
.

c c can b c s t be understood i n

ounce, s t a r t e d moving upYeptcmbcr t h e p r i c e r o s e S 500 an ounce. Since

wzrds i n June
21x2 ranched a

..

t h e n it has
i t has not

t o d e c l i n e , though

400 .an ounce.

m a y be r e l a t e d

we discussod nbovo, loircr i n t c r e s t therefore e r h c o ' .the areadly the r i s e i n

t o cnrly ~ s p t e n b e r

gold and tho

pusbidg i t s p r i c e ua.

t h i i d woe* of June d l i n g .interest rates, accompanied by an

2nd the s u b s e q u c n t od,i&

up o f . i n t c r e s t r a t e s .

n o t the ;lain i n f l o e n c e .

I s i m .f i c m t t h a t while I t is:

b u t i n t e r e s t . r a t e s wero c l e a r l y

&-old

p r i c e s t a r t e d rising i n the . t h i r d we& of June, i n t e r e s t

r a t c s s t o r t c d f a l l i n g only i n t h o f i r s t rvcck o f July. Thc r i s c i n gold prica: fr,om tho

lbp$gh+$f ,of

Junc

s c c n s t o have followed t h o bcha4iour of commoditypricea. l r o n early 1980, commodity p r i c d s h a d bccn !allin;.

.tlic t h i r d wcck of Juno, m c t a l p1jicastnrtc4 ~ ~ ~ o v up i n g:rd

1

But i n

dl othcr c~mnbdity priccs hnrdAed.

Betwcen June 22 and

J u l y 20, t h c Economist indox of b c t a l p r i c x s r c g i s t c r e d an inprovcmcnt of 13 p c r c e n t whilo d l o t . h o r. co~!mlodi-Ly pricc t h i s s t a g c what this t r c n d was due t o . t o i n f l a t i o n a r y e x p e c t a t i o n s and vcotnent demand f o r

components

of t h c

i n not c l c a r a t
i n t h e comodity prico t h a t i t contributed ence t o a r i s e i n t h e inthat i n

Soltombar both gold p r i c ? and k l e commodity p r i c o index f e l l . Though i n t e r e s t r a t c s hzvc i n f l u o n c c d t h o m c o n t

ycl/

Pomriodity p r i c c s sccm t o c l o i n gold p r i c c , tho cxplaincd by t h o f cars of d o f a u l t

1 ~ xm 3 p~ l i t u ' d c of t h o
Ilcxic,m payments c r i s i s

on dcbt by' otllor

i n ~ t c r n n t i o n a lbarks.

i n gold p r i c e s e t i n motion

i n Auyst (of thc

b y 110xico' s
~3.ul1 " 1 '

~rJlErof International Scttlcmontp

I

ho p r i c c of gold con-

t i n u e d t o r i s e i n t o tho f i r s t wcbk of Soptcnbcr ns t h e f e a r sprcad t h a t o t h o r n a j o r d a v e l o p Ii y country borrowors, such

a s Brai5.1,. ~ r ~ c n t i i a l ad Chiic;p??c t h e i r debts. JA/

about t o d h f a u l t on

Tho Mexican c r i s i s came; phcn g o l d p r i c c w a s moving up. So i t appcrzo t h a t tho re[nbtion t o t h e llcxican nowe

o r ~ l ycxa~gor:rtod f o r a while tko trend which had nlrondy boon set. Thc s h a r p f a l l t h e r c n f t c r rcprescnted o c o r r e c t i o n

2d j u s t n c n t t o t h e c x x g e r n t e d

wad movement.
.&I

Our s t u d y of t h o i n t e r n i t t i e n d gold p d c e rnov&at

i n d i c a t e s ' t h n t t h e r e a l gold p r i c e (nominal p r i c e d e f l a t e d by tho p r i c c i n d e x of m a n u f a c t b e d exports) moved i n a c y c l i ccS 'fc3ldan durtng t h e l a s t deei16cj The gold p r i c e cycles

rrcrc, ' i t appears, caused by s p ~ c u l a t i v c investment i n . & l d . Tllc s p e c u l a t i v e bchaviour, i n , u r n , u r m i n f l u e n c e d by t h e

underlying c y c l o s of econonic F t i v i t y (which w e r e roprcsentod

t,

b i t h e i n d c s of wo.r3fd 'trade).

l n c r e & i n g e&nonic a c t i v i t y

gonorated : i n f l a t i d n a r y e x p e c t a i i o n s of u n c c r t d n t y (as reflected ,-ol~~.pric fl eu c t u a t i d n s )

cLnd

i n c r e e s c d tho c i x t ~ n t

iP

i n c r e a a d & x c h n g c r a t o and

An'.~ncentive w a s thereforo, creati n gold, which. t h e n econonid a c t i v i t y had

ed ' t o i n c r e a s c s p e c u l a t i v e

pushed .up. t h e gold p r i c e .

the

oppovibo c f f c c t .

Ik general., we found

th)eft i n t e r c s t r a t e s d i d not.have

a s i g n i f i c a n t . dmieni'ng e f f e t t l

b?i gold

p&ce.

R i s i n g econo-

u i c a c t i v i t y k;&d t h e e f f e c t ofl'hulling up gold p r i c e and

i n t e r e s t r a t c s simaltmeously.
expectations and g r e a t e r

t h e f aco of I n f l a t i o n a r y ty, r i s i n g i n t e r e s t rates

wcrc not a b l e t o p u l l down gold

fclling activity simnltan~ously $ad a doprossing e f f e c t on gold p r i c e and i n t e r e s t r a t o s . S i n c c mid-1900, howevcr, i n t c r c s t r a t c s have been high

i
I

Siccs.

Also, i n 1974

- 75,

( risin:

s h a r p l y over c e r t a i n p e r j o d s ) evcn under s t r o n g d e f l a Thus gold p r i c e hns been under tho doublc
3

tic n a ry conditions.

iinprcssing i n f l u o n c o of i ~ l t e r e s tr a t e s .

d o f l a t q o n a r y s i t u a t i o n nnd high

That s p c c u l a t i v c investment should h i v e been the domin m t i n f l u e n c e on gold p r i c e r e f l k c t s , probably, t h e g r e a t e r c s l > o r t u n i t i ~f s o r f i n a n c i a l specu n t i o n nnd reduced expected r e t u r n s from productive a c t i v i t y f n t h e i970s nnd e a r l y 1980s.

I
I

. vely iii;iiins't t h e background of t h e r e 1it ~ new phenomenon of

$
I

" n t , ? g f l a t i o n " ( l o n g term d e c e l o r d j i o n i n production nnd r i s i n g i n f l i t i o n r c t c s ) , c y c l i c a l movements i n economic a c t i v i t y c r e c t e d s t r o n g i n c e n t i v e s f o r s p e c u l a t i o n i n gold.- 16 / The r e c e n t ' b u o y m c y i n go1 f c l l t i l l June 1982, r a i s e s t h e q
nay now be expected t o r i s e f o r s

p i c e , a f t e r t h e sharp whether gold p r i c e O u r analysis i s unlikely t o nccordinp:

suggests t n c t i n t h e s h o r t term r i s e s i g n i f i c c n t l y s i n c c world Co present projeckions. i s ~ates are not l i k e l y t o

gold p r i c e w i l l r i s e only i f some i $ t o r n n t i o n n l c r i s i s develops, b u t such a r i s c may only t o tc4pornry.

For the. l p n g - m ,

othek f a c t o r s have t o be c o n s i d e ~ c d .

L'rperts who f o r .e. c a s t i n upwar4 t r e n d i d l g o l d p r i c e r e l y princ i p d l y on t h r e e f a c t o r s .

~ i + s tthcy:.dd l ~ not foresee

,
,

n?ly

n'ajor breakthrough i n e i t h e r @nual output o r r e l e a s e - .from t h c S o v i e t Block.

9;. . So now s u p q l l a

of gold a r g oxpocted

to

s t a b l i s e a t the c u r r e n t l e v e l + Sc'cenrlly,' monetary authorit i c , s , which a t one time playeq a ' s i g n i f i c a n t r o l e i n the gold n n r k e t , a r e n o t expected t o r l i a s e monetary stoclcs of gold. T h i r d l y , investment-cum-spocu n t i v o domnnd f o r gold is ox-

p c c t e d , w i t h a l l i t s ups and ddwns, t o maintain b r i s i h g trend. Even assuming t h a t immediate prospect of a r c not q u i t e beyond doubt.' t h e g o l d market i s heid by
. d . icated above, c o n t r o l ,in . . The more t h e y hold on t o

9*

o w s u p p l i e s of gold have no

, the
tPq

o t h e r two assumptions

!Me' ~ a j o sword r hanging over lmonetary authorities who, a s t h e world stock of gold. without having much mone,

t m y use f o r i t . . t h e -thcy nay s t a r t divestment

t h a t on? day

should t h e y decide on t h a t couyse. Also, t h e assumption t h b t s p e c u l i t i o n w i l l o x e r c i s e a n upwad p r e s s u r e on g o l d p r i / c e depends n ~ dniy t on the

. .

judgment of i n e e s - t o r s on V l o .).ikc~.~'long barn' s t r t ~ t o of~

monetary a u t h o r i t i e s but d b d Ion the long-term trends i . economic a c t i v i t y , p a r t i c u l a l i a on the continuance of "dtag-

fiction". The path of the Prltkmntiond price of gold is

n o t no clonrly ii?dicntod as i l n s,omotirnos uuggootod.

Foot notes ('The authors a r e grateful i o C. ~ j a ~ & u m & f o r his. s t a t i s t i c a l assistance) After 1961, Gold Pool w@ t h e i n s t i t u t i o n a l mechnnisn f o r lroopine tho nominal prico oT'gold at n c o m t m t lovol. For dct3ils,' s e e Einzig, : 1972, pp 70 73. . . OECDbsnrver, E X rch 1982, p. 9. The f i g u r e s ' m e collLcted by the'?@ I n t e r n n t i o n j l Settlements, and rephesent the external positions of banlcs i n tho group of Ton coun\trios, S w i t z o r l n d , A ~ s t r i n ,Deiunarlc, Irplnnd nnd some off-shoro branches of US b m k s . A. The d e t c i l s above nx2 from Govatt and Govott. 1982, pp 87-88. The s t a t i s t i c s on @id supply nnd denmd flows uscd i n t h i s soction arc prom Comncrce, pp 1116 7 , which, i n turn, has nlccn t h e figures from ConsoliAnnual Report, 1982. datcd Gold Fields L t
J
.

r
I

.,

Indian production i n the 1970s has been around 3 tons. Thc rensons f o r prof unccrtnin s i t u a t i o n s md p s y c h o l o ~ i c a l gold i n i n f l a t i o n a r y and sought i n t r a d i t i o n a l

See Roosn et ill, 19'?,, Tables 1 nnd 2. The expected r a t e s of r e t u r n on !a d o l l a r changed i n nid 1980 with a l a r e e incrcase i n US i n t c r q s t r a t e s , rmd the I sharo of t h o dollaq jjq intcrnntionnl landing i n c r o a ed t h e r e a f t e r .

i1.

17

The peak attained i n ymunry 1900 was p a r t l y influenced by t h e I r a - I r a q lc n f l i c t . However, even id l a t e 1979, the r e d . p&cc of @ l d w n s a i g n i f i c m t l g higher t h m ' i n Dec be$ 1974, when the o n r l i e r pcak a r a c e (The~o~ :of f p n r t i c y l a r ovcnts. such as the I r h - I r a q on vf> c,t, i n dioo~~nnod h o 3 . o ~i n soction 7 . ) The measure 'captur&l #uctuntiomaroimd n trend represented by tho avern a of tho monthly growth rates.
I

The important These ,are

Arc the yems 1979 and 1981.

Once $gain--l979 a n d 1981 3rc exceptions. In 1979, exchange r a t e f l u c t u a t ~ . o n s i 'e f l l , w g l e gold

'

price fluctuation s .. increasled. This s u g g e s t s ' t h n t . t h e . high i n f l a t i o n a r y ' e x p ~ c t s t i o n si n t h a t year on account of t h e . s h a r p r i s e iin p e t r o l e m p r i c e ( a f t o r m nttomptcd fouY y e a r s o f s t a b i l i t y ) & s u l t e d i n c movement out a l l c u r r o n c i r b i n t o gold. The 1981 oxporionco i a d i ~ c u m o db ~ ! l i l wi n '.tho main-toxt.

11/' S u e E I ~ r s h a l l , ,1923, p p . 80 - 82.

p 257 b d a l s o Robertson, 1959,

1 'j/

'

.. . N o corresponding + a l y s i s f t h o I n d i n n gold prico novcnmt s was attempt ed. %om the' l k d i a n p0in.t -of v i e w , t h e d i f f e r e n c e betvc$n-the i n t e r x i a ~ i o n n ld'-' I n d i a n geld p r i c e i s of importnncc. This difference p r i n c i p d l y e x t e n t of s n u g g l i n g of gold and movements in for~ign exchange. I n d i a n view p o i n t , a.g novencnt i s e x t r e m e l y imgo
,
' -

16/ -

This r a i s e s some t i o n s h i p betiieen p a c t on t h e .go i n t o

...and i t s im-

Tcble 1.

Growth Trends i d t h o World Econom m u d r a t e ovey / a f a y .o. u periodf

Crosr.t!l r n t c 3 of:

I ) World g r o s s dome5.6 s t i c prodact

!loto

.Source

Crou.L;h r a t o n for 1981 .qo p r o l i m i n n r y nnd f o r 1982 aro forocasta. ... . : UlT (1982)~woi.ld~Economic s : u v e y , 1 9 8 1 4 2 , lit% York, Table 1-2. @ . 9.
:

? a b l e 2:

U n c e r t c i n t s bnd
I

old P r i c e

. Exchnnp,:,

Yccr. . ..

~ 3 t o Flucf uations
.

Red . J~old ~rico ..?luc t u a t i o n s

;'

'

, .

Red Gold P r i c e
'

SUPPLY OF GOLD (METRIC TONS)

q:->n .-

I
/

,A,
/
/

A., '

'.. -. 1
1

1
: . , i

11600

' ;

1200

'.. . I
i
t
I'

'Y:.. : .:
"

Z"

L.-,.-T--,-1
REAL OrjLD PRICE
----.--

~ ~ U R : C!) ECOhn,hAtERCE,. 1982 pplll6-7

2 ) i ~ \ F , INTEITNATICNI L FINANCIAL STATISTICS, VARIOUS ISSUES.

\.

.. .--el
/
"

!
1

'

\
\

.~
'

\.

l
\

/r I'i
i
\
\ \
I'

' I

,
I

i.
I

1300

i
I ,) .
I '

i
I

!Fir!

j.

.,
1

:
''
1 I

- \

i i

II
I

i
I
I

. 'T i'/Q

/'

'.\.---

/'

.\
I i I I ' I ? I I
I

; .

I -

\ I

I'

6 I--. 7... ..I.-.-...7 _ ...-.

1

1071 72

--.---.-

.- -.. .-.. -,-.-. -.7"'-'Ij joo .-.T -... 7 7.4 75 76 7 j 78 79 $3 8 1 1 R'FAL Gi3L.D Prd\i:.E INDEX
..!-

--,

/:

.- .-

... -. .jF_\N&i.:..ARY

DFNTtSTRV

'ELECTRON !C

APjO iS'fiifll< I F I D ~ J S T R I A LDEZOI?I'\T~~'T: ~ USES OF c?C?LO. '-'

EAL, GoL9 FRiCE ~ N D E x ~ ~ ~ ~ = I ~ c ) ) K.2 BULLION DEMAND CN~ETRIC TONS.

60C

BULLION DEMAND AS PER CENTAbE OF GOLD SUPPLY

----

----- SULLION DEMAbIP .. . ... . .. BULLION DEMANCi AS PER CENTAGE OF

'YO-rAL GOLD DL;LLIOI\I SUPPLY.

REAL COLD PR!CE

CHART 3 SOURCE : ASnINCHART i

REAL GCLU PRICE IP!VF X

.- - - - - BULLION HOLDINfi5

- OFFICIAL. LOINS

PRICE INDEX ~ ~ M = I O C P ) RATE OF GROWTH )

('o/,

- -- -CHART 5

REAL OLD PRICE INDEX RATE , F 6RO\Nf H O F PETROLEOM RRICE

SOURCE : IMF, INTERNATIONAL FINANCIAL STATISTICS , VARIOUS ISSUES

... . . , . . ., NOMINAL PETROLEUM PRICE INDEX - - ---.REAL PETROLEUM ' ~ Q I C EINDEX ----REAL GOLD PRICE
CIiART 6 SOURCE: AS IF4 CHART 5

-- -

RASE OF O R O W H OF E~ I N D E X C3F: M.NUFACTU

K T UNIT VALVE

C I-i,~\R"I' '"7

so~;nc~ 9: INV,

VARIOUS ISSUES

I~~TIZ.R~~ATION FINT;~NC.!AL ,~~L STAT\Sl;T\CS,

2 ) LIN, MC~NTHLY BULLET~N OF GTATtST\CS, VARlULAS I S S U E S

PRICE

INDEX ~ 9 7 5 = 1 0 0 )

- --

REAL 601-0 PRICE, INDEX REAL FOOD @RIG E

CHART 8

SOURCE: A 5 I N CYART 7

WORLD TRADE lNDLg

cl975=109

T'

References:
1.

Cagan, Phili;, 196 The i n f l u e n c e of i n t e r e s t r a t e s o n , t h e d u r a t i o n of b u s i n e s s cyclos Guttentag, Jcck M and Cagan ed' Essays on i n terest National Bureau

Columbia Uni2. Commerce, June 2~61 11982.

I

3,

m,
4.

Dombusch, R. 198 rate economics: where1 B r o o k i n ~ s~ , i p e r s j dd Economic ActiNo. 1 , 1980.

Economist, Septem e E i n z i g , ~ i u 197f l . M a c n i l l m , Londo 1 Govett M H and G dem&.md ' s u p p l Vol. 8, No. 2,

5.
6.

11 F pbtiny

11, 1982. of gold,

7.

J a s t r m , Roy W 197b The golden c o n s t a n t : t h e E n g l i s h c7.d A I U ~ . c a n experience, 1560 1976, 3 i t o n d d P r e s s P u b l i c a t i o n , John Wiley and Sontjr.

8.

K o u r i , P e n t t i J K b d de Macedo, J o r g a Bragn 1978 Exchange r a t e s and t h e i n t e r n e t i o n d ad justqient process, a k i n ~ s o a p e r s ' o f Economic A c t i v i t y , No. 1 , 1975. l,l(lachlup, F r i t z 1969 S p e c u i a t i o n on gold s p e c u l a t i o n American Economic Review Vol. 59, No. & . E N 1969. H a r s h a l l , Alfred 1423 Money, C r e d i t and Comerce, Augustus M. K e l l o y , New York.
OECD O h n o r v u r , Muroll, 1932.
I

9.

10.
11.

12.

Robertsan, Dennis 11/959 Lbctures on Econonic P z i n c i p l c q , Vol. 111, S t a p l e s P r e s s , LonLon. Koosa, Robezt V e t l a 1 1982 Reserve d u r r e n c i e s i a t r w i t i o n ~ G r o u pof T h i r t y , New l o r k , Y.' A*

I .