Gold, Platinum, Silver. Demand and Supply in the International Finance Market: An Empirical Analysis

Abstract

This paper presents and estimates three econometric models on Gold, Platinum and Silver. The purpose is to provide empirical analysis on the historical price movements of these three commodities and how they are affected by factors in the economy. While we are intrigued by all three precious metals, the main focus of the report is on Gold which continues to be a hot topic among investors, speculators, analysts and others. Great consideration has been given regarding Gold a long lived commodity in the international finance market. We used time series data from February 1976 to July 2007. Demand and supply factors were considered. Three separate regressions were run on the precious metals. We used the Consumer Price Index as Inflation Rate (“CPI”), Nominal Effective Exchange Rate (“NEER”), S&P GSCI Commodities Index (S&P), 3-Month U.S. Treasury Bill (“T-Bill”), and the World Gold Reserve (“WGR”) as explanatory variables for all three precious metals. Financial Crisis and War were used as dummy variables. The CPI, NEER, S&P and T-Bill were most significant, while the WGR and dummy variables returned not significant on the Gold price. However, the CPI and NEER had the most impact on the Gold price. An increase in the CPI by 1% would result in an increase in the Gold price by 0.53497%, holding other variables constant. An increase in the NEER by 1% would lead to a decrease in the Gold price by -0.58529%, holding other variables constant. Silver and Platinum were secondary in our analysis. An increase of 1% in the CPI and S&P would increase the Platinum price, while other explanatory variables decreased the Platinum price. Overall, the CPI had the most impact on the price of Silver, increasing the price by 0.64749%, holding other variables constant. Our result also suggests that the weakening of the US dollar, speculation by investors, analysts and others regarding future economic pressure, growth in demand by investors other than Governments, and scarcity contributes to the increase of Gold price.