DOCSLIB.ORG

Gold Price Dynamics Around the Clock

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Gold Price Dynamics Around the Clock Copenhagen Business School Department of Finance 15th May 2019 Gold Price Dynamics Around the Clock Authors: Francesco Donati (115765) Johannes A. Jung (115540) Supervisor: Paul Whelan Pages: 98 Characters: 183,273 Thesis submitted in partial fulfilment of the requirements for the degree of Master of Science in Advanced Economics and Finance (Cand.Oecon) Acknowledgements We want to thank Copenhagen Business School for the splendid learning opportunity. We express our deep gratitude to the thesis supervisor, Paul Whelan, for his guidance. We want to thank our friends and families for their precious support during this exciting last period of our student life. A special mention goes to our parents, of course. We want to thank the amazing people met in the program, their energy, drive and diversity inspired and improved us. We will be missing all the ups and downs of student's life. Further, we want to thank Beyza and Emanuela, for the laughs and joy they brought us every day. Lastly, Johannes wants to mention that his girl Ploy is more precious than gold to him. Francesco & Johannes Abstract In this thesis we examine intraday behaviour of gold prices in the 24 hours day. We make a distinction between eastern world (China, India) and western world (US, Europe). We suspect that the intraday pattern may be affected by two factors: (i) large gold imports by eastern countries and (ii) manipulation of the London Gold Fix. We find a hat-shaped intraday seasonality, with gold appreciating during eastern trading hours in a robust way and depreciating for the rest of the day. Additionally, in the years of alleged manipulation gold prices drop around the London fixing times. In a multivariate regression analysis we find that East and West returns respond differently to the same shock, which means that eastern and western clienteles react asymmetrically in their gold consumption choices. Lastly, we backtest trading strategies trying to exploit the pattern. When transaction costs are not taken into account they outperform the market, with Sharpe ratios as high as 1.61. When taken into account, trading strategies underperform the market, but still show some profitability. Contents 1 Introduction 1 1.1 Motivation . .1 1.2 Literature Review . .2 1.3 Research Questions and Methods . .4 1.4 Main Findings . .5 1.5 Structure of The Thesis . .5 2 Gold - An Overview 7 2.1 Why do People Trade Gold? . .7 2.2 The Global Gold Market . 12 2.2.1 Supply . 13 2.2.2 Demand . 15 2.2.3 Trading venues . 17 2.3 The London Bullion Market . 18 2.3.1 Unallocated and Allocated Gold . 18 2.3.2 The Fixing Process . 19 2.3.3 Manipulation of the Fixing . 21 2.4 The COMEX Gold Market . 23 2.4.1 Gold Options . 23 2.4.2 Gold Futures . 24 2.4.3 The Delivery Process of Futures . 24 3 Data 27 3.1 Gold Data . 27 3.1.1 Why COMEX Gold Futures . 28 3.1.2 Reducing Frequency . 28 i 3.1.3 Cleaning Quotes . 30 3.1.4 Cleaning Volumes . 32 3.1.5 Data Properties . 32 3.2 Macro Data . 33 4 Market Microstructure 35 4.1 Returns . 35 4.2 Volatility . 38 4.3 Liquidity . 40 4.4 Trading Volume . 40 4.5 Interrelations . 42 4.6 Summary of Results . 43 5 Robustness Checks 45 5.1 Daylight Savings . 46 5.2 Different Sample Periods . 49 5.2.1 Three Sub Periods . 49 5.2.2 Year by Year . 52 5.3 Calendar Effects . 55 5.3.1 Month of the Year . 56 5.3.2 Day of the Week . 58 5.4 Summary of Results . 60 6 Macroeconomic Relationships 63 6.1 Established Relationships . 63 6.1.1 Gold, Inflation and Interest Rates . 63 6.1.2 Gold and Currencies . 66 6.1.3 Gold and Other Commodities . 67 6.2 Contemporaneous Correlations . 67 6.3 Contemporaneous Regressions . 69 6.3.1 Econometric Method . 69 6.3.2 Empirical Results . 71 ii 6.4 Summary of Results . 75 7 Trading Strategies 77 7.1 Active and Passive Strategies . 77 7.2 Performance Measures . 78 7.3 Without Transaction Costs . 80 7.3.1 Profitability . 81 7.3.2 Performance . 83 7.3.3 Portfolios . 84 7.4 With Transaction Costs . 85 7.4.1 Profitability . 86 7.4.2 Performance . 88 7.4.3 Portfolios . 88 7.5 The Efficient Market Hypothesis . 89 7.6 Future Profitability of Active Strategies . 91 7.7 Summary of Results . 91 8 Conclusion 93 A Additional Tables 95 B Additional Figures 109 iii iv List of Tables 6.1 Correlations between Macro Variables and Returns . 68 6.2 Estimation Results Ideal Specification . 71 6.3 Estimation Results . 72 7.1 Yearly Returns, without Transaction Costs . 82 7.2 Yearly Returns, with Transaction Costs . 87 A.1 Global Gold Stock . 95 A.2 Global Gold Demand by Sector . 95 A.3 Global Gold Supply . 96 A.4 Global Gold Reserve by Country . 96 A.5 Global Gold Mining Supply by Region . 97 A.6 Global Gold Mining Supply by Country . 97 A.7 Gold Trading volumes, Average Daily . 98 A.8 Gold Trading Volumes, Yearly (Exchange Only) . 98 A.9 Macro Variables . 99 A.10 Year by Year Average Returns . 100 A.11 Month of the Year Average Returns . 101 A.12 Day of the Week Average Returns . 102 A.13 Correlation Matrix . 103 A.14 Sharpe Ratios, without Transaction Costs . 104 A.15 Sortino Ratios, without Transaction Costs . 105 A.16 Sharpe Ratios, with Transaction Costs . 106 A.17 Sortino Ratios, with Transaction Costs . 107 v vi List of Figures 2.1 Barclays Manipulation Case . 22 3.1 Volumes and Spreads, Year by Year . ..
Load more

Recommended publications
  • Swiss Gold Initiative
    SWISS GOLD INITIATIVE Version 04: A briefing analysis prepared for the SGI Initiative on the current global Gold market set in its historical context. Alan Leishman 04.03.2014 Swiss Gold Initiative 04 Alan Leishman 1 13.11.2014 SWISS GOLD INITIATIVE ‐ The gold of the Swiss National Bank must be stored physically in Switzerland. ‐ The Swiss National Bank does not have the right to sell its gold reserves. ‐ The Swiss National Bank must hold at least twenty percent (20%) of its total assets in gold. Swiss Gold Initiative 04 Alan Leishman 2 13.11.2014 Nationalrat Luzi Stamm Reason dictates that transparency, a certain percentage of physical gold, and a gold‐ backed currency which does not devalue are the principles which should be followed by all the central banks around the world. In this, the Swiss National Bank should serve as an example to others. Swiss Gold Initiative 04 Alan Leishman 3 13.11.2014 SNB reveals location of Gold Of our 1,040 tonnes of gold, more than 70% and thereby the overwhelming proportion is stored in Switzerland. The remaining 30% is distributed between two countries. Roughly 20% of the gold reserves are kept at the central bank of the United Kingdom, and approximately 10% at the central bank of Canada.” http://snbchf.com/2013/04/swiss‐gold‐location‐gold‐initiative/ | SNB & CHF Swiss Gold Initiative 04 Alan Leishman 4 13.11.2014 Swiss Gold Location SNB Swiss Gold Location 17.01.2014 Location Tonnes % Switzerland 728 70 United Kingdom 208 20 Canada 104 10 Total 1040 100 Swiss Gold Initiative 04 Alan Leishman
    [Show full text]
  • A Comprehensive Guide to the Gold Price
    A Comprehensive Guide to the Gold Price A Comprehensive Guide to the Gold Price Table of Contents ______________________ Introduction ..................................................................................................................... 2 The Global Gold Market ............................................................................................... 3 The Over-the-Counter Spot Market ............................................................................ 4 The London Gold Fix ................................................................................................... 5 Futures Market Gold Prices.......................................................................................... 7 Where is the Gold Price Established? ....................................................................... 8 Gold Price Ratios ......................................................................................................... 10 Determinants of the Gold Price ................................................................................. 14 The Components of Demand and Supply ................................................................ 14 The Factors Behind Demand and Supply ................................................................. 15 The Gold Price and Inflation ..................................................................................... 16 The History of the US Dollar Gold Price ............................................................... 18 The 1934 Repricing to $35 Per Ounce .....................................................................
    [Show full text]
  • The Effect of Lease Rates on Precious Metals Markets by Merlin Marr-Johnson, Metals Analyst, HSBC Bank USA
    THE LONDON BULLION MARKET ASSOCIATION The Effect of Lease Rates on Precious Metals Markets By Merlin Marr-Johnson, Metals Analyst, HSBC Bank USA In the precious metals First, it is probably worth Gold the interest rate differential returning to the simplest Again, the key to lease rates is in between dollar yields and lease markets, lease rates are fundamental of all. As changes in the supply and demand of lending. rates.The producers therefore buying (demand) and selling Staying with gold, the supply side unwittingly reinforced the frequently cited as root (supply) affect prices, so changes for gold lease rates rests firmly on arguments for a declining spot in borrowing (demand) and the large lending reserves market and a rising lease rate. causes for metal price lending (supply) affect lease rates. available to the market. Central The borrowing, of course, banks currently hold helped generate a strong demand behaviour. However, the A lease rate is simply the going approximately 29,000 tonnes of environment for borrowed market ‘price’ for borrowing or gold (multi-lateral institutions gold, which elevated lease rates reason for the lease rate lending the market. If a market is hold around another 4,200 to over 2%. oversupplied relative to demand, tonnes).With the perceived behaviour itself is rarely prices/lease rates are low, and if a economic stability of the 1990s, The reason for the shift lower in market is undersupplied relative and strong returns being achieved lease rates since 2000 stems from examined. This short to demand, prices/lease rates are by most asset classes, central bank an almost total reversal of every high.
    [Show full text]
  • The London Bullion Market Association Responsible Gold Guidance
    The London Bullion Market Association Responsible Gold Guidance About the London Bullion Market Association The LBMA is the international trade association that represents the market for gold and silver bullion, which is centred in London but has a global client base, including the majority of the central banks that hold gold, private sector investors, mining companies, producers, refiners and fabricators. The current membership includes 129 companies which are actively involved in the loco London bullion market, including trading houses, banks, refiners, miners and fabricators as well as those providing services to the market such as consultants, supervisors and assayers. The membership encompasses a total of 22 countries. The LBMA was formally incorporated in 1987 at the behest of the Bank of England to take over the roles previously played by two separate organisations, the London Gold Market and London Silver Market, whose origins go back to the mid-nineteenth century. The LBMA Good Delivery List In the refining industry, the LBMA Good Delivery List includes the world’s pre-eminent refiners of gold and silver, located in 31 countries. The List is widely recognized as the de facto standard for the quality of gold and silver market bars. This recognition is based on the stringent criteria that applicants must satisfy before being listed, as well as the regular proactive monitoring of accredited refiners by the LBMA. In addition to satisfying the LBMA’s technical standards, a refiner seeking LBMA accreditation must meet a number of non-technical criteria in relation to ownership, tangible net worth and operating history. In response to the Dodd-Frank legislation on conflict minerals emanating from the DRC, the LBMA has informed all gold refiners on the List that in order to maintain their Good Delivery status, they will have to demonstrate that their refined output is conflict-free.
    [Show full text]
  • The Last Central Bank Gold Agreement
    ALCHEMIST ISSUE 96 THE LAST CENTRAL BANK GOLD AGREEMENT This is an extract from the European Since 1999 the OVER TIME INNOVATIONS gold market has IN FINANCIAL ENGINEERING Central Bank (ECB) Economic Bulletin, grown and matured FACILITATED THE USE OF GOLD Issue 7 2019, reproduced with the in terms of liquidity AS A FINANCIAL INSTRUMENT 2 kind permission of the ECB. and investor base . THANKS TO THE DEVELOPMENT The structure of the OF EXCHANGE-TRADED gold market differs The last Central Bank Gold Agreement (CBGA) expired in September from that of other PRODUCTS TRACKING GOLD 2019 after 20 years of such agreements. The CBGAs’ signatories financial assets, as PRICES AND BACKED BY included the Eurosystem and the central banks of Sweden, Switzerland gold does not only PHYSICAL GOLD and – initially – the United Kingdom. The first CBGA1 was set up in 1999 serve investment for a five-year period, when concerns about the negative market impact of purposes, but also has practical uses. At the time of the first CBGA, uncoordinated gold sales by central banks were evident, and increasing, the diversity of demand for physical gold was low and concentrated in the gold market. The goal of the CBGAs was to help stabilise the gold in jewellery, while the contribution to demand from the official sector market by alleviating these concerns, relieving downward pressure on was negative. gold prices, and contributing towards more balanced supply and demand conditions by limiting and coordinating central banks’ gold sales. The CHART A Agreement was renewed three times, each time for a five-year period.
    [Show full text]
  • Lending and Borrowing Metal Lending Allocated Metal Options
    Editor’s Note SECTION 9 Introduction London Bullion Market Association Lending and Borrowing London Platinum and Palladium Market Metal The Price London Good Delivery – Gold and Silver Deposits and Leases Good Delivery – Platinum and Palladium London Precious Metals Clearing Limited Calculation Basis Precious Metal Accounts Interest Paid in Currency or Metal Lending and Borrowing Metal Lending Allocated Metal Options Precious Metal Benchmarks Forwards Bank of England Outright Forwards Futures Markets and Exchange Traded Products Forward Forwards Physical Metal Documentation Short Dated Forwards Market Regulation Transaction Dates Taxation ‘End End’ Convention Conversion Table Key Facts about Precious Metals Market Size Clearing Statistics Contango or Backwardation Market Trade Statistics Central Bank and Governmental What Determines Metal Interest Rates Ownership of Gold Properties of Precious Metals Receiving Interest on a Deposit Frequently Asked Questions Options Annexes Disclaimer BACK TO CONTENTS 39 THE GUIDE 2017 - Version 1.0 Editor’s Note Lending and Borrowing Metal Introduction London Bullion Market Association It is often blithely asserted that precious metals have no interest rate. At maturity, the loan can be rolled over (depending on credit This is incorrect. considerations), either with the existing lender or with another bank. London Platinum and Palladium Market The lender has full credit exposure to the borrower over the amount of The Price Deposits and Leases the loan – the currency value of which will fluctuate as the underlying The rationale for lending and, particularly, borrowing metal will vary metal price increases or decreases. London Good Delivery – Gold and Silver between gold, silver, platinum and palladium. However, very broadly speaking, lenders of metals will be seeking a return on their investment, However, it is unlikely that the fibreglass manufacturer will have ready Good Delivery – Platinum and Palladium whereas the borrowers will have a variety of motives.
    [Show full text]
  • Downloaded From
    IMPORTANT: The Stock Exchange of Hong Kong Limited (the “SEHK”), the Securities and Futures Commission (“SFC”) and the Hong Kong Securities Clearing Company Limited take no responsibility for the contents of this Announcement, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this Announcement. Sensible Asset Management Hong Kong Limited (the “Manager”) accepts full responsibility for the accuracy of the information contained in this Announcement as at the date of publication, and confirms, having made all reasonable enquiries, that to the best of its knowledge and belief, as at the date of publication, there are no other facts the omission of which would make any statement misleading. SFC authorisation is not a recommendation or endorsement of a scheme nor does it guarantee the commercial merits of a scheme or its performance. It does not mean the scheme is suitable for all investors nor is it an endorsement of its suitability for any particular investor or class of investors. Investment involves risks, including the loss of principal. You are advised to consider your investment objectives and circumstances in determining the suitability of an investment in the Value Gold ETF. An investment in the Value Gold ETF may not be suitable for everyone. If you are in doubt about the contents of this Announcement, you should consult your stockbroker, bank manager, solicitor, accountant or other professional adviser. Value Gold ETF (A Hong Kong unit trust, authorised under Section 104 of the Securities and Futures Ordinance (Cap.
    [Show full text]
  • Outlookmerge Template
    The Honourable Mary L. Schapiro Chairman U.S. Securities and Exchange Commission 100 F Street, NE Washington, DC 20549 United States of America 5th August 2011 Re: Proposed Rule Release No. 34-63547; File No. S7-40-10 Dear Chairman Schapiro, LBMA Comments Relating To Dodd-Frank Section 1502 Conflict Mineral Legislation The London Bullion Market Association submits this letter in parallel with the statement dated 29th July 2011, made by the participants in the multi-stakeholder forum for conflict-free mineral supply chains, convened by the International Conference on the Great Lakes Region (ICGLR), the Organisation for Economic Co-operation and Development (OECD) and the UN Group of Experts on the Democratic Republic of the Congo (UN GoE on DRC). The LBMA would like to express its broad support for the above-mentioned statement and to highlight the main issues which relate particularly to the gold market. About the London Bullion Market Association The LBMA is the international trade association that represents the wholesale over-the-counter (OTC) market for gold and silver bullion, physically based in London. The current members are shown on the attached list. London is the focus of the international OTC market for gold and silver with a client base including the majority of the central banks that hold gold, plus producers, refiners, fabricators and other traders throughout the world. The LBMA was formally incorporated in 1987 in close consultation with the Bank of England. In the refining industry, the LBMA Good Delivery (GD) List is widely recognized as the de facto standard for the quality of gold and silver market bars.
    [Show full text]
  • Zhou Xiaochuan: Gold Market Functions to Hedge Against Risks
    Zhou Xiaochuan: Gold market functions to hedge against risks Speech by Mr Zhou Xiaochuan, Governor of the People’s Bank of China, at the 2004 London Bullion Market Association Annual Precious Metals Conference, Shanghai, 6 September 2004. * * * I would like to congratulate, on behalf of the People’s Bank of China and in my own name, the convening of 2004 London Bullion Market Association Annual Conference on Precious Metals. Relying on improved infrastructure and as a cohesive force in the national economy, Shanghai is developing various types of financial markets. Any of these markets, be it a foreign exchange market, a bond market, a futures market or a gold market, serves as an important center that connects and influences the rest of the country. This is why it is so encouraging and appropriate to hold this year’s Precious Metals Conference in Shanghai. London gold market is the biggest as well as the oldest gold market in the world. In 1804, London replaced Amsterdam to become the world’s gold trading center; in 1919, London gold market was formally founded; and in 1982, London futures market for gold declared its foundation. Currently, the London gold market is trading at a per week volume of 2-3 billion U.S. Dollars, accounting for 43% of the world’s total gold transactions, establishing itself into not only the world’s largest gold sales market, but also a governmental gold trading market for most of the world’s central banks. It is even a major force in influencing the gold prices in many other countries and regions.
    [Show full text]
  • Gold: a Commodity Like No Other About the World Gold Council Contents
    World Gold Council 10 Old Bailey, London EC4M 7NG United Kingdom T +44 20 7826 4700 F +44 20 7826 4799 W www.gold.org Published: April 2011 Gold: a commodity like no other About the World Gold Council Contents The World Gold Council is the market development organisation Executive summary 01 for the gold industry. Working within the investment, jewellery The golden touch: enhancing a commodity allocation 02 and technology sectors, as well as engaging in government affairs, Optimal portfolios 03 our purpose is to provide industry leadership, whilst stimulating A history lesson: gold at the core of a portfolio 04 and sustaining demand for gold. Gold’s essence: a distinct behaviour 05 We develop gold-backed solutions, services and markets, Demand and supply 05 based on true market insight. As a result, we create structural Bullion market 07 shifts in demand for gold across key market sectors. Derivatives market 08 We provide insights into the international gold markets, Gold’s role as a monetary asset 09 helping people to better understand the wealth preservation Reducing counterparty risk 09 qualities of gold and its role in meeting the social and The golden rule: optimal performance in good times and bad 10 environmental needs of society. Achieving true diversification 12 Negative correlation when it is needed most 14 Based in the UK, with operations in India, the Far East, Turkey, Contango and backwardation 15 Europe and the USA, the World Gold Council is an association whose members include the world’s leading and most forward Conclusion 16 thinking gold mining companies.
    [Show full text]
  • Let™S Get Physical
    Let’s Get Physical BY JOHN HATHAWAY ON DECEMBER 12, 2012 Money printing by world central banks, it would seem, has propelled the prices of all things rare. The list includes fine art, vintage wines and antique sports cars. It is front page news that the flood of paper money has enhanced the quotation of almost any tangible asset perceived to be in scarce supply. In a 11/23/13 article, The Economist reports: “Evermore wealth is being parked in fancy storage facilities….The goods they stash in freeports range from paintings, fine wine and precious metals to tapestries and even classic cars.” The article observes that a key factor fuelling “this buying binge…is growing distrust of financial assets.” It doesn’t hurt that the prices of most of these items have trended steadily higher in price over the past decade. Most intriguing in this array of ascendant alternative assets, however, is the crypto currency known as Bitcoin, whose advocates offer a rationale that is striking in its parallel to that for holding gold bullion. Bitcoin, as almost everyone knows, is a liquid transactional medium of strictly limited supply. The parallel breaks down, of course, when it comes to price behavior of these two otherwise similar alternative currencies. The price of a Bitcoin has increased to $975/coin (Mt. Gox 12/10/13) from less than $25 in May 2011. At the end of May 2011, bullion traded near $1500/oz, and is quoted today at a price that is 17% lower. The supply of gold has increased over the past two years by 180 million ounces.
    [Show full text]
  • Pdf Gold Prices
    Gold Market Primer Gold Prices March 2018 www.gold.org Price discovery is crucial for any market. Gold Summary not only has a spot price, but it also has the LBMA Gold Price, as well as several regional The LBMA Gold Price is an important reference price for prices. The LBMA Gold Price is used as an the market. The price is used globally by numerous different participants, including bullion banks, central important benchmark throughout the gold banks, miners and fabricators. market, while the other regional prices are The LBMA Gold Price is determined via an auction important to local markets. process, whereby participants submit buy and sell orders. The price is continually adjusted until these are in balance This primer serves as an introduction to the London Bullion and the price is agreed. Market Association (LBMA) Gold Price, as well as other key Regional gold prices reflect local dynamics. China has gold prices across the globe. The first section is an introduced the Shanghai Gold Benchmark Price to better introduction to how the LBMA Gold Price is determined reflect an RMB-denominated reference price. In India, and used. The second section provides an overview of the local gold prices are affected by several factors, and can Shanghai Gold Benchmark Price, while the third section vary from state-to-state. explores the factors affecting prices in India. 1 auction is over, they will have a bilateral trade with their LBMA Gold Price Direct Participant. They do not share in the imbalance. In March 2015, the LBMA Gold Price was introduced, To be able to qualify as a Direct Participant of the auction, replacing the historic London Gold Fixing.
    [Show full text]