UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL HOCHIMINH CITY STUDIES VIETNAM THE HAGUE THE NETHERLANDS VIETNAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS FACTORS AFFECTING THE WORLD’S GOLD PRICE: AN ARDL APPROACH BY VU THUY DUONG MASTER OF ARTS IN DEVELOPMENT ECONOMICS HOCHIMINH CITY, OCTOBER 2013 TIEU LUAN MOI download : skknchat@gmail.com UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS FACTORS AFFECTING THE WORLD’S GOLD PRICE: AN ARDL APPROACH A thesis submitted in a partial fulfillment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By VU THUY DUONG Academic supervisor: Dr. CAO HAO THI HOCHIMINH CITY, OCTOBER 2013 TIEU LUAN MOI download : skknchat@gmail.com Acknowledgement The thesis could not be completed without considerable supports from my academic supervisor, Dr. Cao Hao Thi, who provided me valuable instructions and comments throughout the process of this thesis. From bottom of my heart, I would like to give my sincerest thanks to him.
I am also grateful to Dr. Le Van Chon and Dr. Truong Dang Thuy for their enthusiasm help about Econometrics techniques and useful advice. Therefore, I can overcome many obstacles to complete my research.
I also take this opportunity to express my thanks for my colleagues. They provided me many assistance and encouragement during the time I do the research. Last but not the least, I would like to thank my family members for their love, encouragement, support for me to finish the Master course as well as the thesis. 1 TIEU LUAN MOI download : skknchat@gmail.com Abstract The paper focuses on investigating factors affecting global gold prices in the short- run and long-run with daily data from January 2007 to December 2012.
By applying autoregressive distributed lag (ARDL) bound test, the empirical results show that there is no evidence of long-run relationship among London gold price, West Texas Intermediate (WTI) crude oil sport price, US dollar index and S&P 500. However, when financial crisis is taken into the research as a dummy variable, the results reveal that financial crisis affects the relationship of gold price with oil price, US dollar index and S&P 500 and cannot conclude that long-run relationship among them existed. Therefore, the State Bank of Viet Nam cannot base on the movement of those variables to forecast the movement of world gold price for making their decision in selling or buying gold. 2 TIEU LUAN MOI download : skknchat@gmail.com Table of Contents CHAPTER 1: INTRODUCTION.
Scope of the research. Structure of the thesis .9 CHAPTER 2: OVERVIEW OF VIETNAM’S GOLD MARKET. The national gold brand of Vietnam. The connection of Vietnam’s gold price to global gold price.1 Domestic gold’s Cost price .2 Domestic gold’s market price .3 The connection between domestic and global gold markets .4 The big gap still exists between the two gold markets .13 CHAPTER 3: LITERATURE REVIEW.
The relationship between gold and oil prices. The relationship between gold price and US Dollar exchange rate. The relationship between gold price and stock market .17 CHAPTER 4: RESEARCH METHODOLOGY. Stationary and unit root test .26 CHAPTER 5: RESEARCH RESULTS.
Stationary and unit root test. Optimal lag length. Serial correlation test. Dynamic stability test .35 3 TIEU LUAN MOI download : skknchat@gmail.36 CHAPTER 6: CONCLUSION AND POLICY IMPLICATIONS .41 Appendix A: Lag structure choosing .46 Appendix B: Bound test result .50 List of Figures Figure 4.36 List of Tables Table 2.1: Correlation matrix between SJC and London’s gold price .2: Correlation testing between SJC and London’s gold price .1: Summary of empirical studies in Literature review .1: Asymptotic critical value bounds for the F-statistics .1: Descriptive statistics of all series .3: Unit root test for stationary at level .4: Unit root test for stationary at first difference .5: VAR lag order selection criteria .6: Serial correlation test’s result .7: Bounds test procedure results without crisis interaction .8: Bounds test procedure results with crisis interaction .36 4 TIEU LUAN MOI download : skknchat@gmail.com Abbreviations ADF: Augmented Dickey-Fuller AIC: Akaike Information Criterion ARDL: Autoregressive Distributed Lag CPI: Consumer Price Index ECM: Error correction models EIA: U.
Energy Information Administration PP: Phillips-Perron SBV: State Bank of Viet Nam SJC Saigon Jewelry Company Limited UECM: Unrestricted error correction model US: United States VAR: Vector Autoregression Estimates VND: Vietnam Dong 5 TIEU LUAN MOI download : skknchat@gmail.com CHAPTER 1: INTRODUCTION 1. Problem Statements There is much attention recently on gold, partly due to the surges in its price and the increase in its economic uses. Gold has a critical position among the major precious metals. Gold is not only an industrial commodity but also an investment asset which is commonly known as a “safe haven” (Baur & Lucey, 2010; Coudert & Raymond-Feingold, 2011) to avoid the increasing risk in the financial markets.
However, gold prices have been remained unabated, even accelerated further in recent years. Since the beginning of financial crisis in August, 2007 to December, 2012, the nominal gold price has increased 146.65% For central banks, gold keeps an important position in their reserve asset. Its role is increasingly enhanced from 2009 when there was so much worry about the health of US economy. Central banks increase to buy gold due to they want to reduce their reliance on the US dollars as a reserve asset, and to encourage borrowings and to ensure interest rates on these loans were reduced.
Bellowing is some evidence recently relating to the trend of buying gold from central banks: i. “Asked what the most important reserve asset would be in 25 years, about half of officials polled by UBS said the US dollar but 22 percent pointed to gold” (Farchy & Blas, 2010). This is showed that the central banks’ demand for gold will remain strong over time. And the report of the World Gold Council published on August 14, 2012, mentioned that: “The second quarter was another period of significant purchasing by official sector institutions, with demand accounting to 157.
This was a record quarter for central bank buying since the sector began recording net purchases in Q2 2009 and was more than double the 66.2 tonnes of purchases made in the same period of 2011. Purchases in the first half of the year totaled 254.2 tonnes, 25% up on 203.2 tonnes from the same 6 TIEU LUAN MOI download : skknchat@gmail.com period last year. The official sector accounted for 16% of overall Q2 gold demand”(“Gold Demand Trends Q2 2012”,2012). It is clearly showed that the role of gold for central banks is even expanding.
In addition, there are some notable policies in relation to gold that central banks and nations are applying to ensure that gold accumulated either in their citizens’ hands or in central bank hands (Phillips, 2012): i. China putted a ban on exporting gold to ensure that all gold that enters the country stays in the country; ii. If the country can produce gold, its central bank will be the directly purchaser. For example: Russia & Kazakhstan bought its locally produced gold in March, 2012; iii.
There is the fact that the trend of buying gold mostly comes from central banks of emerging and newly wealthy nations. Their gold holdings are very small in comparison to central banks of US and Europe. In Viet Nam, the domestic gold prices got so much fluctuation since September 2009. Especially in 2012, the gap between global and domestic prices had been largely widen, sometimes reaching VND 5 million per tael (a tael is equal to 1.2 ounces) when the demand for gold is larger than the supply for gold due to the “big guy banks”.
This has caused serious problems to the exchange rate as well as economy. Khanh (2010), the General Director of Sai Gon Gold and Silver ACB- SJC Joint Stock Company, argued that the increasing in gold price will have both direct and indirect impact to the USD/VND exchange rate, indirect impact to the CPI, affect monetary policy, stock market and real estate market, etc. To solve the problem of gap or to stabilize the gold market that is also the requirement of the National Assembly of the Socialist Republic of Vietnam from Resolution No. 51/2010/QH12 on the 2011 Socio-Economic Development Plan, there are some notable legal documents issued by the Government and The State Bank of Vietnam (SBV) from 2010 such as: (i) Circular No.
01/2010/TT-NHNN 7 TIEU LUAN MOI download : skknchat@gmail.com dated 06/01/2010 about closing the gold trading floor and terminating all activities of gold trading on foreign account; (ii) Circular No. 22/2010/TT-NHNN dated 29/10/2010 about not allowing the commercial bank to convert gold into paper currency and lend for gold trading activities; (iii) Decree No. 24/2012/ND-CP dated 03/04/2012 about using gold bars as a tool of payment will be illegal and the State will keep a monopoly on gold bar production, export and import of raw materials for gold bar production via the SBV; (iv) Circular No. 16/2012/TT-NHNN dated 25/05/2012 guiding some articles of Decree No.
Yet, those documents have limited the gold supply to the market while the gold demand is still large that make gold prices still “crazy” when global gold price increases. In addition, according to the Decision No. 16/2013/QD-TTg issued by the Prime Minister on 04/03/2013, gold bullion would be bought and sold by the SBV as needed to keep the gold prices stable and SBV, based on its monetary policies, would buy additional gold bullion from other countries for the aim of controlling foreign reserves. This decision is highly appreciated due to it will be an opportunity for the SBV to fully perform the role of “conductor” to stabilize gold prices.
So, it is necessary that SBV should choose appropriate time to buy gold from abroad in order to increase reserve asset or to boost the supply side. In other words, SBV should find out tools to forecast the movement of global and local gold prices when other factors changed. From the above features, the paper will focus on analyzing factors (that are addressed in the literature) affecting global gold prices. Research objectives The main objectives of this paper include: i.
To investigate the relationship between local and global gold prices; ii. To identify variables that affects global price of gold in the short-run and long- run periods; 8 TIEU LUAN MOI download : skknchat@gmail. To find out whether the SBV can base on the movements of global gold price while making their decision. Research questions To obtain the mentioned objectives, the paper will try to answer the following questions: i.
Do Vietnam’s gold prices and global gold prices correlated? ii. What are the factors affecting global gold prices? iii. What is the recommendation to the SBV? 1. Scope of the research The research focuses on finding main factors affecting to global gold prices.
Primarily, the paper will give an overview of Vietnam’s gold market and the connection between it with global gold market. Secondly, following the literature, the paper will explore variables affecting to global gold prices and their directional relationships. Thirdly, a model of global gold price will be estimated in which global financial crisis is included as a dummy variable. Data used for the research are secondly time series for the daily period from 2007 to 2012 due to daily data for Vietnam gold prices are not adequate.
Structure of the thesis The paper is organized as followings: The chapter 1 explains reason why the topic of thesis is chosen, gives main objectives, major research questions and the scope of the research. Chapter 2 provides some overview of Vietnam’s gold market, the connection between Vietnam and global gold markets. Chapter 3 covers the literature about the relationship between gold price and oil prices, US dollar exchange rate, and stock market. Chapter 4 presents the research methodology, data collection.
9 TIEU LUAN MOI download : skknchat@gmail.com Chapter 5 shows statistic results from adopted model.