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Procedia - Social and Behavioral Sciences 40 (2012) 341 – 346

Asia Pacific Business Innovation and Technology Management Society

Effects Of Gold Price On Equity, Bond And Domestic

Credit: Evidence From ASEAN +3
Sayyed Mahdi Ziaei*
a
Universiti Teknologi Malaysia (UTM),Faculty of Management and Human Resource Development, Johor Bahru,Malaysia

Abstract

The gold market has seen a steady price rise in recent years. Obviously, factors affecting gold prices include the fundamentals
of aesthetic and precautionary demand for gold. This paper, utilizes the GMM model to analyze the effects of gold price on
equity, bond and domestic credit in the ASEAN+3 countries (Indonesia, Malaysia, the Philippines, Singapore, Thailand, China,
Japan and South Korea). The results indicate that gold price significantly influences bond and equity market, particularly with
any negative changes in equity market having positive effects on the price of gold. However, the effect that gold price has on
domestic credit is not pronounced. The significant relationship between gold price, equity and bond market implies that the
recent worldwide financial crisis and instability such as recession and deficit problems in the Euro zone and the US have
increased the precautionary demand for gold in Southeast Asian countries, at least over the last five years.

Ltd. and/or peer-review under of the Asia

© 2012 Published by Elsevier Selection responsibility
Ltd. and/or peer-review under of the Asia Pacific
Business Innovation and Technology Management Society Open access under CC BY-NC-ND license.
Pacific Business Innovation and Technology Management Society (APBITM).”

JEL classification: G10,G14, G15

Keywords: Gold, Financial markets, Uncertainty

1. Introduction
The price of gold has dramatically increased over the last decade; with the rate of gold return in
recent years making this yellow metal an attractive investment asset. Demand for gold has especially
increased in East Asian countries including China, India, Japan, Korea and the ASEAN countries. In
addition to a boost in gold demand in Asia, the Euro zone and US crisis has contributed to the
increasing gold price. The high unemployment rate, as well as the budget and current account deficit in
the US, shows that American economy can not revive smoothly from recession in the short term; thus
the dollar position as stock currency in recent years is in danger. The credit crunch for 2008 shows that
banking and financial market crises are not separate or single accidents, but can also can create long
term consequences. However, ASEAN countries as well as China, Korea and Japan have shown
economic readiness to launch a mechanism in trade, financial and currency cooperation regionally,
and they can also protect their economies against new economic problem waves. The purpose of this
paper is to empirically examine the relationship between gold price and three important financial
market factors, namely equity, bonds and domestic credit for the ASEAN+3 countries in a crisis period,
by using dynamic panel data models based on Generalized Method of Moment estimation (GMM). The

a
Corresponding author. Tel.: +60-
0173031251 E-mail address: ziaei@utm.my.

1877-0428 © 2012 Published by Elsevier Ltd. Selection and/or peer-review under responsibility of the Asia Pacific Business Innovation
and Technology Management Society Open access under CC BY-NC-ND license.
doi:10.1016/j.sbspro.2012.03.197
342 Sayyed Mahdi Ziaei / Procedia - Social and Behavioral Sciences 40 (2012) 341 – 346

rest of the paper is organized as follows. Section 2 provides literature on financial asset
conditions in crisis situations. Section 3 describes the data, methodology and results from
this empirical analysis. Section 4 presents the concluding discussion.

2. Literature
This paper focuses on the relationship between gold price and the three important financial market
factors of equity, bonds and domestic credit in financial crisis situations for ASEAN+3. During the
financial crises investors encounter uncertainty and risks, and in order to reduce the risks of suffering
large losses, investors try to diversify their assets (Tseng, 2011). Calvo and Mendoza (2000)
emphasized that in instability situation, investors try to change their portfolios to average portfolios, a
process called flight to quality or flight from quality (Hartmann, 2004). As Boyer et al., (2006) said, in
asset market crisis periods, some asset like bonds used as hedge of equity might have co movement
patterns within equity fluctuation. It is also possible during instability for some assets to have negative
correlations with specific asset types and co movement with others. Bauner and Lucey (2009) analyzed
flight from stocks to bonds for eight developed countries. The results show that flight exists and happens
especially during financial market turbulence. Some experts believe that flight to quality or flee from one
asset to another, increases financial system stability because it helps reduce losses during crisis
periods. Most studies regard a shift from one asset to another as a focus on flight to quality or bond-
stock correlation ( Keim & Stambaugh, 1986; Illmanen, 2003; Durgey et al., 2006; Stivers et al., 2006;
Tseng, 2010). Only few studies have evaluated flight in various assets during financial instability periods.
For example, Baur and McDermott (2010) have analyzed 30 years of data from some emerging and
developed countries, and claim that gold is considered a hedge for major European stock markets and
the US. Due to this metal’s importance in financial crises, different studies try to focus on the effects gold
price has on other economic variables. Capie et al., (2005) used a single equation model and dynamic
model to examine the effects of gold price fluctuation on exchange rate. The results show that gold is
considered a hedge for exchange rate, but exchange rate can not explain gold price variation as a
dependent variable. Joy (2011) evaluated 23 years of dollar paired exchange rate in order to answer
whether gold acts as a hedge against the dollar, or as a safe haven. The results indicate that gold has
been a poor safe haven but behaved as a hedge against the US dollar. Furthermore, in studies by
MaCown and Zemmerman (2006), Capie et al., (2005) and Lucy et al, (2006), gold inflation -hedging is
confirmed. Some experts believe that asset variations close to each other lead to fleeing from one asset
to other. Anderson et al., (2007) analyzed the US, British and German markets and concluded that
exchange rate fluctuations are higher than bond market fluctuation. An other study by Hau and Rey
(2006) shows that the ratio of exchange rate fluctuation to equity return is close, but less than one. In
addition to evaluating the effects asset variables have on each other in crisis situations, some expert are
weighing how news affects assets. In different studies such as by Anderson (1996), Kilian and Vega
(2010), the consequence of the news on metals like gold are investigated. They believe different kinds
of news might produce a variety of stochastic arrival processes, and thus convey varying influences on
gold price behavior.

3. Methodology and results

This study used, a panel GMM model data set consisting of quarterly data for 8 East Asian countries
(Indonesia, Malaysia, the Philippines, Singapore, Thailand, China, Japan and South Korea) from 2006q4 to
2011q1. The panel is balanced in the sense that there are same observations on all countries. Using panel
modeling, especially GMM in the case of ASEAN+3 countries, enhances evaluation power and efficiency.
Moreover, in the GMM model data must be differenced so that, non-stationary problems get solved while
coefficients and standard errors are confidently reported. Furthermore, in panel estimation, employing mean
differencing, biased coefficients are created, due to a correlation between fixed effects and regressors. This
problem is especially more obvious when the time series is small. In the generalized method of moments, this
problem is solved by using lagged regressors as instruments based on GMM system. The dynamic models for
ASEAN+3 to be estimated are:
ln EQ = β ln EQ + β 2 ln B + β 3 ln DC + β 4 GP + β D + ε i,t (1)
i,t 1 i,t-1 i,t i,t i,t 52008
 Sayyed Mahdi Ziaei / Procedia - Social and Behavioral Sciences 40 (2012) 341 – 346 343

ln B = βln B + β2 ln EQ + β 3 ln DC + β 4 GP +β 5 D+ ε i,t
i,t 1 i,t-1 i,t i,t i,t 2008
(2)
ln DC =β 1 ln DC +β 2 ln B + β 3
ln EQ + β 4 GP + β 5 D 2008 + ε i,t (3)
i,t i,t-1 i,t i,t i,t

Where i = 1,...N;t = 1...,T ; ln EQi,t = ln EQi,t - ln EQi,t-1 , and analogously for the other variables.

ln EQi,t is the total outstanding equity, stock market capitalization is used as a proxy for total equity
outstanding. ln Bi,t is total outstanding local currency bonds, ln DCi,t is total domestic credit and
lnGP is the gold price, in terms of U.S. dollar in each ASEAN+3 country. D
i,t
is a dummy 2008

variable for the 2008 crisis credit crunch in and ε i,t is the error term. All data is expressed in natural
logs.

Tables 1, 2 and 3 explain GMM of Arellano and Bond estimation for the dynamic equity, bonds
and domestic credit model. All estimates are acquired by using the instruments lagged up to one
period. The Sargen test (used for over identifying restriction test) in all three models demonstrates
that there is no correlation between the instruments and the error term of the first differenced
equation. WJS is the Wald statistic of joint significance of independent variables.

Results show all three lagged dependent variables have significant effect on the dependent variable.
In first model (Table 1), equity considerably depends on bond and gold price, but there is no significant
relationship between variation of equity and domestic credit. In fact, according to the estimated value, a
1% increase in gold price would lead to a 0.28% decrease in equity in the short time. Moreover, a 1%
increase in bond market, changes the equity value by 0.73%. In the second model (Table 2), bonds
significantly depend on domestic credit, equity and gold price. A 1% gold price increase leads to a 0.14
% decrease of bond value. Also, a 1% increase in equity market positively changes bond by 0.06 %.
Moreover, the results show that the domestic credit effects on bond are more than the effects of equity
on bond values. In the third model (Table3), except for bonds with significant effects on domestic credit,
equity effects on domestic credit are not pronounced and there is no significant effect between gold price
and domestic credit in the ASEAN+3 countries. Furthermore, the negative effects of the credit crunch
crisis have also been corroborated by the data for ASEAN+3 in all three models.

Table 1. Estimation for the dynamic model for Equity-

Arellano-Bond two steps
Variable Coefficient

EQ 0.752∗
t-1
(0.044)
B
0.738∗∗∗
(0.242)
GP ∗∗
- 0.275
(0.105)
DC - 0.098
(0.231)
D2008 ∗
- 0.147
(0.050)
WJS ∗
538.93
Sargen 228.87
∗
344 Sayyed Mahdi Ziaei / Procedia - Social and Behavioral Sciences 40 (2012) 341 – 346

Table 2. Estimation for the dynamic model for Bonds-

Arellano-Bond two steps
Variable Coefficient

B ∗
t-1 0.377
(0.049)
EQ ∗
0.062
(0.011)
GP ∗
- 0.132
(0.031)
DC ∗
0.394
(0.055)
D2008 ∗
- 0.093
(0.238)
WJS ∗
3784.21
Sargen ∗
170.01

Table 3. Estimation for the dynamic model for Domestic

Credit-Arellano-Bond two steps
Variable Coefficient

DC ∗
t-1 0.509
(0.060)
B ∗
0.424
(0.063)
EQ ∗∗∗
0.025
(0.014)
GP 0.021
(0.050)
D2008 ∗
- 0.194
(0.349)
WJS ∗
2350.77
Sargen ∗
93.87
*reject null hypothesis at 1 percent level; **reject null
hypothesis at 5 percent level;***reject null hypothesis at 10
percent level;

4. Conclusion
This paper employs the GMM model to investigate the effects of gold price on equity, bond
and domestic credit in the ASEAN+3 countries. The results show a significant negative
relationship between gold price and the equity. Gold can act as a hedge against equity due to
its significant effects on equity, but this result proves that gold price can not be considered a
safe haven in the case of ASEAN+3. On the other hand, the effect of gold price on both bond
and equity is significant; however, compared to empirical studies for European countries and
the US, the effect is much less. This outcome is interesting since gold price is expected to have
a higher role in equity value variation in the East Asia region, because ASEAN +3 (especially
China, Japan, Korea, Singapore and Malaysia) have large gold stocks; besides, precautionary
demand, application for jewelry is much higher than in western countries. Moreover, the
results indicate a positive relationship between bond value and equity value during crisis
periods. According to Boyer et al., (2006), during an asset market crisis period, some assets like
bond used as stock hedge might be in co movement pattern with stock fluctuation.
Furthermore, results show there is no significant relationship between domestic credit and
gold price. In this analysis, the lag values of all three main financial variables (bonds, equity and
domestic credit) have significant effect
 Sayyed Mahdi Ziaei / Procedia - Social and Behavioral Sciences 40 (2012) 341 – 346 345

on their dependent variable. Even though these countries have been resisting incoming
financial crisis waves, the dummy variable coefficient demonstrates that the 2008 credit
crunch had significant, negative effects on bonds, equity and domestic credit.

Acknowledgements

The author would also like to convey thanks to Dean (Prof. Dr. Amran Rasli) and all
academic staff of Faculty Management and Human Resource Development, Universiti
Teknologi Malaysia, for their assistance and support.

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