THE ECONOMICS OF GOLD PRICE MOVEMENTS. 1980.
Abken (1980) addresses the issue of how to price gold – done at a time when its price was rising rapidly at the end of the 1970s and beginning of the 1980s. The author develops a detailed model based on gold stocks and flows along with storage costs and discusses both spot and futures prices.
Variables listed and explained in detail as explanatory are extreme political and economic uncertainty, the supply and demand for gold, inflation and the policy of governments regarding whether they are buyers or seller of gold. Governments and central bank purchases and sales are seen as important, an idea which was prevalent following the closure of the gold window, but the effect of their actions is not addressed empirically.
The empirical analysis of the model is based on the beginning of the month PM gold fixings price and one month US T-bill rate from 1973 to 1979 on a monthly basis. They find that 1 and 2 month lags of changes in the gold price are insignificant, pointing to market efficiency. It is also found that changes in nominal interest rates have a significant and positive relation to gold price changes. This is explained by first assuming low storage costs and a negligible convenience yield from holding gold, neither of which are shown to be the case. As a non-interest bearing asset it is assumed that investors will only hold it if its price appreciates sufficiently to compensate them for the missed interest from risk free t-bills. Overall the model explains 3.9% of the variation in gold prices. Despite the theoretical discussion at the beginning of the article inflation, extreme uncertainty or central bank actions are not included in the model in any way.
The authors also provide evidence that futures prices over the period are unbiased predictors of future spot prices using a regression in levels. This estimation procedure has been shown to be less than ideal in more recent studies on this issue for other assets where the regressions are in 1st differences. Recent work has updated these findings.
Abken, Peter A. “The economics of gold price movements.” Federal Reserve Bank of Richmond (1980).