Gold in Trust: Tonnes: 412.67 Ounces: 13,267,795 Value US$
Why is gold different from other assets? An empirical investigation
By Colin Lawrence1 Download
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The lack of correlation between returns on gold and those on financial
assets such as equities has become widely established. This research
tested the argument that the fundamental reason for this lack of correlation
is that returns on gold are not correlated to economic activity whereas
returns on mainstream financial assets are. Other commodities, which
are generally thought to be correlated with economic activity, were
A number of different relationships were examined to show that returns
on gold are independent of the business cycle. Using both static and
dynamic analysis this study examined to what extent there is a relationship
between economic variables and (i) financial indices (ii) commodities
and (iii) gold.
Using the gold price and US macroeconomic and financial market quarterly
data from January 1975 to December 2001, the following conclusions
There is no statistically significant correlation between returns
on gold and changes in macroeconomic variables such as GDP, inflation
and interest rates;
Returns on financial assets such as the Dow Jones Industrial
Average Index, Standard & Poor's 500 index and 10-year US government
bonds are correlated with changes in macroeconomic variables;
Changes in macroeconomic variables have a much stronger impact
on other commodities (such as aluminium, oil and zinc) than they
do on gold; and
Returns on gold are less correlated with returns on equity and
bond indices than are returns on other commodities.
These results support the notion that gold may be an effective portfolio
It is thought that the reasons which set gold apart from other commodities
stem from three crucial attributes of gold: it is fungible, indestructible
and, most importantly, the inventory of above-ground stocks of gold
is enormous relative to the supply flow. This last attribute means
that a sudden surge in gold demand can be quickly and easily met through
sales of existing holdings of gold jewellery or other products (either
to fund new purchases or for cash), in this way increasing the amount
of gold recovered from scrap. It may also be met through the mechanism
of the gold leasing market allied to the trading of gold bullion Over-the-Counter.
The potential for gold to be highly liquid and responsive to price
changes is seen as its critical difference from other commodities.
Although returns on gold may be correlated with those on other commodities,
it is thought that the strength of this relationship depends on the
extent to which each commodity shares the crucial attributes of gold,
particularly that of high liquidity. Further study is, however, required
to isolate the effect of liquidity variation of different commodities.
1 The author is Honorary Visiting Professor of Risk Management,
Faculty of Finance, Cass Business School, London and Managing Partner,
LA Risk and Financial Ltd., a consulting firm.