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The effect of the price of gold on its production: a time-series analysis. 1999.

by on July 9, 2014

This paper addresses whether the real price of gold has an effect on its production, using data from Western Australia (WA) from 1948 to 1994. The authors find that the gold price directly causes its production in this region.

They also show that the real price of gold has distinct short and long run impacts on its supply. The 1 year price elasticity of supply for gold in WA is shown to be only 0.03, meaning that if the gold price increases by 10% the supply of gold will only increases by 0.3%. The effect of an increase in price on the supply of gold in 3 years is more substantial with a 10% increase resulting in a 5% increase in supply. The effects of price changes disappear after 5 years.  This lagged reaction to price changes reflects the time it takes for mines to increase production or bring new mines into production. However only the 3 year price elasticity of supply appears t0 be statistically significant.

The authors also show the cumulative impact of price changes on supply. After 5 years the change in production is show to be proportionate to price (a 1% increase in price give a 1% increases in production over the period).

Data:  Annual Gold Production for Western Australia from Western Australian Yearbook, Australian Bureau of Statistics (ABS), Annual gold price from same. Australian CPI from WA Monthly Summary Statistics, ABS. All from 1948 – 1994.

Methodology: Unit Roots and Cointegration.  Granger Causality. Ramsey’s Error Specification Test (RESET).

Citation:Selvanathan, Saroja, and E. A. Selvanathan. “The effect of the price of gold on its production: a time-series analysis.” Resources Policy 25.4 (1999): 265-275.

Abstract: Production of gold in Australia has grown strongly in recent years. Australia is ranked the world’s third largest gold producer, only South Africa and the US produce more than Australia. Most of the Australian gold production comes from one of its states, Western Australia. In this paper, we use recent developments in econometric time series analysis to present an analysis of gold production and prices during the period 1948–1994. The results show that if the price of gold (relative to costs) increases by 10% and the price (in levels) remain the same for the next 5 years, then in the first year gold production will rise by 0.3%; in the second year by 2.2%; in the third year by 7.4%; in the fourth year by 8.9% and in the fifth year by 10.7%.

 

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From → Empirical, Gold

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