Market Anticipations of Government Policies and the Price of Gold. Salant and Henderson (1978)
This 1978 paper develops a theoretical model of the effect of market participants anticipating sales of gold by the official sector.
Under normal circumstances it is assumed that the price of gold will rise at the rate of interest in order to compensate holders of gold. It is shown that if there is a probability of a Central Bank sale of gold the price of gold should rise faster than the rate of interest before the sale in order to compensate holders of gold for the negative price shock of this extra supply to the market. This assumes that there is no other reason to hold gold other than price appreciation.
They show that fits with real data where announced sales cause price falls as market supply increases, but price rises at faster than the rate of interest when no announcement has been made but it is possible that one might be made in future.
Method: Theoretical. Theory of exhaustible resources, Hotelling (1931).
Data: Monthly Gold price and US CPI. Reports of intended government and IMF sales of gold.
Abstract: This paper is an analysis of the effects of anticipations of government sales policies on the real price of gold. Although the risk of a future government gold auction depresses the price, it also causes the price to rise in percentage terms faster than the real rate of interest and at an in-creasing rate. Even risk-neutral investors require this rate of return as inducement to hold gold in the face of the asymmetric risk of a price collapse. Announcements making a government auction more probable cause a sudden drop in the price. Government attempts to peg the price or to defend a price ceiling with sales from its stockpile must result eventually in a sudden attack by speculators.
Full Citation: Salant and Henderson (1978). Market Anticipations of Government Policies and the Price of Gold. The Journal of Political Economy,86(4):627-648