The Application of Gold Price, Interest Rates and Inflation Expectations in Capital Markets

Abstract

The aim of this research is to determine a forecasting model of the price of gold in relation to the rate of interest from 1971–2013 that would benefit wealth managers in their forward interpretation of capital market expectations. It is not a model for market makers, since the price-setting dominance of banks in the physical as well as derivative markets presents a problem for any economic agent participating in these markets. Nonetheless, the ability to understand the variability of gold, interest rates and prices would clearly enhance financial planning and investor performance. This research models a full population of the price of gold with the rate of interest, in order to assess what impact a change in the interest rate would have on a change in the gold price (and vice versa). In developing a model price of gold that is strongly correlated with the actual price, the outcome of the research expects to show that not only is the interest rate and the gold price manipulated in relation to each other, but would also affirm the Gibson's Paradox, that real gold is inversely related with the real interest rate, so that real prices are positively related with the real interest rate.