Professional Documents
Culture Documents
Gold
Gold
Gold
CHAPTER ONE
INTRODUCTION
In Malaysia, there are a lot of type investment that investor can invest to gain
a return. Such as fixed deposit, bond, stock or share, unit trust or mutual
investment.
Fixed deposit is the most common type an investment that doesn’t need too
many money to invest. Almost all banks provide this service; it is not the best
investments as they are guaranteed by the bank as well as the central bank
of the country.
THE RELATIONSHIP BETWEEN PRICE OF GOLD AND INFLATION RATE,
INTEREST RATE (BLR) AND EXCHANGE RATE
Bond is investment that uses a term and maturity to make sure the investor
compared to share investments. At the end of the bond term, the company
that issued the bonds will return your invested amount to you. The price of
wait for the bond to mature, otherwise investor will have to surrender to the
Stock or share is also famous type of investment that will give high return to
their investor. But the return is all depend on the risk that they will face it. One
word that investor should know is, high risk high return. This is seen as a
more risky investment but is faster in returns or losses as well. Ideally, you
Unit trust or mutual fund is also one of famous investment and it is most
million people and these funds are all handled by professionals and experts
under one particular investment account. The return of this investment is all
term. The fact that the investment are supported and backed by the
government, so investor can be sure that your investment is safe and less
risky.
THE RELATIONSHIP BETWEEN PRICE OF GOLD AND INFLATION RATE,
INTEREST RATE (BLR) AND EXCHANGE RATE
Insurance investments these are like insurance policy which includes some
your term.
most people, property investments are most popular and are seen as long
term investments.
THE RELATIONSHIP BETWEEN PRICE OF GOLD AND INFLATION RATE,
INTEREST RATE (BLR) AND EXCHANGE RATE
Gold is metal that have a high value and beside that, the value of gold never
drop drastically. Besides that, gold also have a high demand in market. Gold
jewellery. Gold also is an ideal value keeper. It can be kept for future use
Some other country use gold as an income sources and also use gold as
main commodity for export to other country like Italy. About seventy percent
(70%) of Italian gold production is exported, which makes Italy the most
important European country in the processing of gold from its raw form to a
finished good. (Fortis, 2006). Because of that, some other country use gold
as an alternative to invest in share market and they believe price of gold will
keep increase, at the same time will give them a higher return.
proof of that and gold was used as money. That means, gold have high
value and the value of money is depending on value of gold. Even though
the value of money reduce based on foreign currency, but the value of gold
Price of gold is always rising and that is what ranks it as the best option for
investment exception to real estate. Presently it of the estimate that the price
of gold keep it track. Because of that, it’s a good time for investor to invest in
gold; because of the return is much higher compare with other investment
Abu Bakr ibn Abi Maryam reported that he heard the Messenger of Allah, may
Allah bless him and grant him peace, say: "A time is certainly coming over
mankind in which there will be nothing [left] which will be of use save a dinar
Gold and silver are the most stable currency the world has ever seen.
Beside that it’s also protect your wealth by buying gold and silver. Public
Beside that, in Malaysia, former Prime Minister Tun Dr. Mahathir Mohamad
trade. He also stressed on making the dinar a trading currency for all country
not only for the Islamic country. During OIC summit in Putrajaya the
international trade.
investment. There are: Maybank, UOB bank, Dinar Emas Klantan, Public
Fine Gold International Sdn Bhd Gold and Public Dinar. Besides that, there
are two way to invest in gold, which is physically (actual gold) or investment
There are three category under physical gold investment, which is first is
gold coin, such as gold coin Public Gold, Dinar Emas Kelantan, Dinar Emas
Public Dinar, Canada Gold Maple (UOB Bank), Australia Kangaroo (UOB
Bank) and Singapore Gold Lion (UOB Bank). Second is gold bar, in
Malaysia there are three gold bar that famous in Malaysia which is PAMP
Suisse (Produits Artistiques Metaux Precieux), Poh Kong Bunga Raya and
lastly Public Fine Gold International Sdn Bhd and lastly is jewellery, such as
Under gold saving account, in Malaysia there are two banks that apply this
Gold is one of metal that have a high value in market, not only for today, but
for a long time ago. This is a reason people tend to buy gold compare with
silver. Because of the trend and history of gold price never give the holder of
that and gold was used as money and even today it has the power of money
and people seem to be using this as an option although real estate has lately
displaced the position of gold as the best investment option because of its
return rate. Gold is an asset that no-one else’s liability unlike other
Today, however the paper notes and coins we call money have no backing
in gold. Great Britain and other major European powers came off the gold
Switzerland stopped backing each franc that it issued with gold in 1936.
Three decades later, the united state finally cut the world supply of money
free from gold when it stopping swapping Dollars for bullion at the Federal
Reserve in 1971. Over the nine years that followed, the price of gold in
Dollars rises more than 23 times over. The US Fed Chairman, Paul Volcker,
hiked Dollar interest rate to almost 20% and that fantastic rate of return
The gold price sank for the next 20 years, falling lower as the world
interest rates were then allowed to slip back. Gold just couldn’t compete.
But fast forward to start of 2003, when world stock market finally turned
higher after the Tech Stock Crash has destroyed half of New York’s Nasdaq
index and professional trader who dared to peep through their fingers at the
financial markets found two asset which is government bond and gold bullion
Gold bullion investment had risen by 25% against the US dollar since Dot
Com Bubble peaked in early 2000 and professional investor just love buying
assets that are clearly enjoying a bull market. So along with stocks, bond
and emerging markets they began to buy gold and buy gold heavily. Gold
investment is actually attractive to mainstream funds for the first time since
1980 because people rightly buy gold when they see inflation ahead.
Besides that, when the financial market look bad, people tend to get worried
real like gold investment which is more perceived to be more trustworthy and
when stock market crashed, stock or share maybe suffer loss but can be
offset by gains in the gold investment. This is because, price of gold that
keep increasing.
Basically, whether bad or good economic condition gold investment will give
the investor or holder gold a good performance in term of their return and
capital gain. It very important to investigate what are the element that
statement.
“Does price of gold will be affected by inflation rate, exchange rate and
interest rate?”
THE RELATIONSHIP BETWEEN PRICE OF GOLD AND INFLATION RATE,
INTEREST RATE (BLR) AND EXCHANGE RATE
The objective of the research is what the research intend to accomplish when
1) To analyse the trend of price of gold for eleven years from 2000
until 2010.
framework discusses the interrelationship among the variable that are deemed to be
relationship and thus to improve our understanding of the dynamic of the situation.
Theoretical framework is to showing how the variables relate each other. (Uma
Sekaran 2006)
THE RELATIONSHIP BETWEEN PRICE OF GOLD AND INFLATION RATE,
INTEREST RATE (BLR) AND EXCHANGE RATE
INFLATION RATE
EXCHANGE
RATE
1.5 HYPHOTESIS
between two or more variables, expressed in the form of testable statement. Beside
There are two hypotheses which are Null hypothesis and Alternate hypothesis. Null
parameters one expects to find. The alternate hypothesis is tested to see whether or
Hypothesis 1
Hypothesis 2
Hypothesis 3
For this project paper, researcher chooses the title of factors that influence people in
gold investment. The reason of the researcher wants to investigate about this title
because of the rising of gold price in every year. Beside that price of gold always
increase and invest in gold, the risk is not too high and gold investment is safest
investment form, compare with other investment such as stock and derivative.
Other than that, there are several factors that maybe influence people to choose gold
as an investment. For this title, researcher wants to see whether inflation rate,
exchange rate and interest rate will be important element for changes in price of gold.
For this research, it will give an answer to researcher whether all three elements is
Some limitation cannot be denied along the process in order to produce a good
project paper
1) Accessibility of sources.
Some materials are confidential and only disclosed to internal users only.
In this study, researcher needs to access the data thru data stream.
Besides that, researcher also having problem to find an article and journal
for literature review. This is because, not all journals from past research
can be downloading. Besides that, only person that have own ID and
make it suitable and related to the scope of study because of limited area
that can be discovered. This will affect the procedures, method and
3) Time constrain.
manage time systematically because this project paper has only less than
CHAPTER TWO
LITERATURE REVIEW
investment. In Malaysia has offered fixed deposit, bond, stock or share and unit
This is because of the reason the price of gold is keep increasing and the
demand and the supply of this material in market is high. Besides that, the value
of gold is high in market and the risk of this investment is not too high compare
with other investment. The previous research, have researcher that study about
the relationship price of gold toward inflation rate, interest rate and exchange rate.
Below are some previous study done in examine the impact of inflation rate,
Gold is one of type metal that have a high value, compared with other metal such
as silver, bronze and also diamond. This can be prove it by Ibn Khaldun, Al
Muquaddimah circa 1397 that mention, And God created the two precious
metals, gold and silver , to serve as the measure of value of all commodities.
They are also generally used by men as a store or treasure. For although other
goods are sometimes stored it is only with the intention of acquiring gold or
silver. For other goods are subject to the fluctuation of the market, from which
THE RELATIONSHIP BETWEEN PRICE OF GOLD AND INFLATION RATE,
INTEREST RATE (BLR) AND EXCHANGE RATE
they (gold and silver) are immune. That shown gold is actually a metal that have
Gold also is used to produce a paper money, in other word is, the value of
money is depending on value of gold. All around the world use this system now a
day. Every central bank use gold as guide value of paper money. Bank Negara
supported by J.P. Mogan that mention, gold is money and also as a change
medium and other word is form of payment. Gold is actually one of form that we
use as a payment form this can be supported by Alan Greenspan 1999 in their
study that found gold still represent the ultimate form of payment in the world.
According Gitman and Joehnk (2008) Investment is any vehicle into which
funds can be placed with the expectation that it will generate positive income and
or preserve or increased its value. In other words is, investment is put something
such as fund in some portfolio in term to get some extra income or excess fund.
In Malaysia, there a many of type investment that investor can invest in order to
get extra income. For example, invest in money market, property and also in unit
According to Syukor bin Hashim (2009) that he mention in his paper work that,
invest in gold is a good way to expand our money because base on trend from
2000-2009 the price of gold is keep increasingly. He also mentions that gold
investment is a good long term investment. This is because trend of gold price
that keep increasing. Gold investment is actually one type investment that
guarantees to their investor they will get a higher return. This is because gold
have a high value and trend of the price of gold never unfavourable. Besides
THE RELATIONSHIP BETWEEN PRICE OF GOLD AND INFLATION RATE,
INTEREST RATE (BLR) AND EXCHANGE RATE
that, gold also is demanded by all people. Gold also have a high of liquidity and
the price that high make people love to invest in gold and the return also high. He
also said the value of gold has been increase by 246% in term of nine years, in
According Jaana Lisette Lutter (2008) in her research found that, there are
some sources that make people invest in gold. In this research her found
elements that make people invest in gold. First is risk management, such as
liquidity risk, financial risk, market risk and also company risk. Second is
behaviour of investor that there are five category of investor such as adventures,
behaviour, there are five different role of consumer like initiator, influencer,
decider, purchaser and user. All the three element give a type of investor that
invest in gold and all these element help the company that issue gold as an
mentions in his speech, Gold Dinar is a good medium in every trade transaction.
Gold dinar is one type of investment that introduce by our former Gold dinar is
actually also help economic country; this is because in his speech in the 2003
cooperation from central banks to avoid the currency crisis from recurring.
Besides that, gold dinar investment can be purchase in Malaysia at Dinar Emas
According to A.C. Worthington and M.Pahlavani (2006) in the study that found
gold provides an effective hedge against inflation and indeed much of the current
hype surrounding gold investment. Besides that in the study, found the
THE RELATIONSHIP BETWEEN PRICE OF GOLD AND INFLATION RATE,
INTEREST RATE (BLR) AND EXCHANGE RATE
conventional wisdom is that because commodities are physical assets, they are
the best way to hedge against rising price which reduce the returns of purely
financial assets like stocks and bonds. Gold investment is a safer investment and
not carries too high risk such as market risk and inflation risk; Gold also is
A study done by Jeffrey F. Jaffe (1989) found that, the betas (risk) of the gold
proxies are higher than the beta for gold. This is not surprising; the fortunes of
any business are likely tied to movements of the market as a whole. However
that diversification of the gold in every portfolio will be less effective with gold
stocks compared with gold. This is because gold has a low correlation with most
assets, suggesting that the addition of gold to a portfolio might reduce the
portfolio risk. Besides that, in his research, found gold has virtually no
relationship with common stock, small stock, and long term government bonds
such as Treasury bills. He also found, there are negative relationship between
gold prices and currency USD. This is because when price of gold increase, USD
According to Zanil Hyder (2010) that mentions in his article that price of gold is
always rising and that is what ranks it as the best option for investment exception
to real estate. He also mention, presently it of the estimate that the price of gold
double in every five years or there is a 100% return on gold investment and gold
on the price of gold in market. When price of gold increase its good for the investor
to sell their investment to gain the higher return. People tend to invest in gold
Besides that, gold price is actually one of the factors that influence stock
performance. In other words is, increasing or decreasing price of gold will affect
stock performance.
According to Mc Donald and Solnik (1977) found in their research, gold price
actually carry a significantly positive effect on stock return of gold mining. In their
study, their find that the return on 25 South African and 10 north American mining
companies show there is a significant relationship between gold price and stock
performance. They also found that, real premium in gold actually is negative
besides that, gold price has still have a significant exposure to the commodity and
in their research also found that, gold still retains its important thing in economic
today.
A study done by Victor Fang, Chien Ting Lin and Warren Poon (2007) found
that, the value of gold beta is greater than one, implying the sensitive nature of
firms’ stock return to gold price changes. This also suggests that investors holding
gold mining stock would receive higher percentage increase in stock returns from
bullion. But, these values have changed substantially over time with significant
changes in gold price volatility. This study also supported by Tufano (1998) which
is in his study found that gold mining firms in north America have substantial stock
price exposure to gold price. For one percent return in gold, the mean and median
gold firms stock return moves by two percent. That means, the return of stock is
depending on gold price. When gold price move, then return on stock also change.
According to Chan and Faff (1998) in their research that found that gold prices
are increasingly positively related to gold stock return over time. They conduct a
similar study in Australia and use CAPM to measure gold bullion price variable as
a potential hedging factor. Price of gold also is a main factors that investor need to
THE RELATIONSHIP BETWEEN PRICE OF GOLD AND INFLATION RATE,
INTEREST RATE (BLR) AND EXCHANGE RATE
count in doing investment gold. The investor need to know the price of gold trend
toward stock return. This is important because to make sure the return that
investor will get is favourable and affordable with their expectation. According to
previous study, some other researcher don’t agree that price of gold is actually the
main factors that influence the movement stock return. Besides that, there is no
significant relationship between price of gold and stock performance. For example
in study done by Khoury (1984), argued that non-gold related risks associated with
the stocks disrupt the influence of gold price changes on the price of securities.
Hence, the potential increase of gold stocks prices is no longer as high as those of
Fluctuation price of gold is actually shown that this commodity is actually is active
in market. For example today gold price is RM154.00 per gram and not possible
tomorrow the price will increase until RM170.00 per gram. This shown that this
commodity is active trade in market that why, the price is keep increasing and not
too much drop even in bad economic condition. This can be approved by article in
Business Today, July 2010, write by V. Bharathi mention that, gold prices shot up
almost 27% per ounce in just three days. He also mention in his article, the main
reason for inverse correlation between rising gold prices and bad economic
conditions is uncertainty and market volatility. Besides that, its also supported by
Manokaran Mottain, the senior economist with AmInvestment Bank said, before
this a central bank sell gold, are now buying that gold back. This is because
everybody wants to hold gold, even in recession time in other word during bad
condition economic.
A study done by P.K. Mishra, J.R. Das & S.K. Mishra (2010) that focusing in
analyse the causality relation that may run between domestic gold price and stock
market return in India. In this study they look at the trend of gold price. Besides
THE RELATIONSHIP BETWEEN PRICE OF GOLD AND INFLATION RATE,
INTEREST RATE (BLR) AND EXCHANGE RATE
that they also look on stock market return performance. The data that they use is
from January 1999 to December 2009,the data is consider domestic gold price
(India) and market return based on BSE 100 Index. They found that, between gold
price and market return have significant relationships. Which means, changes in
According Wikipedia, inflation rate is a rise in the general level of price of goods
and services in an economy over period of time. Inflation also reflects erosion in
the purchasing power of money. Inflation also has negative and positive impact to
the country. For the negative impact for the country is, inflation will decrease in
real value of money and other monetary item over time, besides that, uncertainty
over future inflation may discourage investment and saving and also increase in
inflation rate will lead to shortage of goods and price of goods will increase in
future. For the positive impact is, will encourage investment in non-monetary
capital project.
Besides that, inflation also defined as a decline in the currency’s value. It will first
be noted in the currency’s exchange rate with gold and likely in the foreign
exchange market and the international market for commodities. Inflation will
eventually result in rising prices, but that is only one of its many deleterious
effects. Inflation is sometimes accidental, but often they are intentional, in which
case they are known as currency devaluation (Nathan Lewis, Gold, 1971 pg 72).
According to research done by Jeffery F. Jaffe (1989) that found, there is positive
relationship between Consumer Price Index (CPI) movement and return on gold.
In his research found 1% movement in the price level is associated with a 2.95 %
THE RELATIONSHIP BETWEEN PRICE OF GOLD AND INFLATION RATE,
INTEREST RATE (BLR) AND EXCHANGE RATE
change in the price of gold. This result show predominately negative relations
between inflation and return on other asset include gold. He also mentions that
gold is not a good inflation hedge. Gold is one of commodity that trade in all over
country. Even though gold have a high value in market but, inflation rate also give
effect to gold price. This statement also supported by R.W. Jastram (1977) that
study about the gold-inflation relationship and found that gold does not effectively
hedge when commodity price index increase because gold does not match
According A.C. Worthington and M.Pahlavani (2006), found that gold market
moving to purely open market operations and the acceleration of inflation in the
that gold is a useful inflation hedge in the post-war and post period 1970s
period.Inflation rate also is the main factors that must be count before investor
make decision to invest in certain portfolio. In investment gold, inflation rate is the
main element to predict the future performance of gold investment. That means,
inflation and gold have a relationship. Gold is also a weapon against inflation.
Because many researchers that study about gold investment agree that gold is a
good investment, this is because of the high value in market, gold also acceptable
by everybody. Even though during bad economic condition, gold still favourable
and the value of gold still high in market. This is supported by Suryavanshi Anil G.
(May, 2010) in her article mention, even though there is up and downs in market,
(inflation) people never stop to buy gold as it is an investment with positive effect
during the recession period. Besides that, gold also is elements that help
economic stability in term of inflation rate. Because of the high of liquidity gold
make people don’t stop to buy. Gold investment also helps investor evenly during
economic recession.
THE RELATIONSHIP BETWEEN PRICE OF GOLD AND INFLATION RATE,
INTEREST RATE (BLR) AND EXCHANGE RATE
According to Tanvi Varma (October, 2010) in her article, her mention because of
high global debt levels inflation and the strong performance of gold compared with
other asset classes have persuaded investors to take to the metal in a big way.
Besides that, there has also been an increase awareness of gold’s role in portfolio
management, considering its low volatility and lack of correlation with other asset.
Besides that, gold’s have a negative correlation with the dollar makes it an
effective hedge against currency fluctuation (inflation). That means, even the value
of dollar decrease, but the value of gold is still and keep strong. At this time, it’s
favourable when investors invest in gold. This is because the return in gold
A study done by Siti Rahmi Utami & Eno L.Inanga (2009) they analyses the
International Fisher Effect (IFE) theory and the influence of inflation rate and
interest rate differentials in Indonesia. IFE theory explains the relationship between
the interest rate differentials of two countries and the expected exchange rate
changes. In this study, they found that result show interest rate differentials have
positive but no significant influence on changes in exchange rate for the USA,
Singapore and the UK relative to that of Indonesia. On other hand, interest rate
Japan. Besides that, regression result show that, inflation rate differential has
inflation rate differential increase, the interest rate will also increase. Overall,
differential.
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INTEREST RATE (BLR) AND EXCHANGE RATE
Interest rate in economic means the consumption schedule includes the option of
indebtedness. If interest rates fall, household may use more credit to finance
According Gitman & Joehnk, (2008) Interest rate in term of investment is act as
downer, which mean when rising rates in interest rate, it will tend to have a
negative effect on the market for stock. There have negative relationship between
interest rate and stock or bond performance. That shown Interest rate is a main
According to Stuart Hyde (2007), which found interest rate, give a significant
impacts on expectation about future dividend and excess return. In his research,
he tests to four major European economies country which is France, Italy, United
Kingdom and Germany. He found that, Germany and France are exposed to
significant levels of interest rate and return of stock and investment. That means,
interest rate and return of stock performance have a relationship. In other word is,
stock performance is depending on interest rate. Besides that, interest rate also
main element in one country, because with interest rate, the speculator, investor
and fund manager can predict the future return for stock and other investment
form. Interest rate is important to individual investor and also to the firms. This is
According to Choi and Elyasiani, (1998) found that, there are significant between
interest rate and stock return. Based on their study, they want to see the sensitivity
of US bank stock return to market, interest rate, and exchange rate risks to 59
THE RELATIONSHIP BETWEEN PRICE OF GOLD AND INFLATION RATE,
INTEREST RATE (BLR) AND EXCHANGE RATE
banks. The results show that, over 23 out of 59 shows there is a significant
between interest rate and stock return. Interest rate and stock return depend on
each other to show the performance. Whether in bad economic condition or good,
interest rate is the main factors to predict the future of stock performance.
According to Gitman & Joehnk, (2008) the bond market is driven by interest
rates. In fact, the behaviour of interest rates is the single most important force in
the bond market. Interest rates determine not only the amount of current income
investors will receive but also the amount of capital gains (or losses) bondholder
will incur. It’s not surprising, therefore, that bond market participants follow interest
rates closely and that bond market performance is often portrayed in terms of
market interest rate. In other words, when interest rates increase, the bond price
will decrease. This can be supported by Michael Coulson, 2005 in his research
found that interest rates were high and gold bonds could be issued with much
lower coupons. These kinds of instrument have gone out of favour. This is
because of the current low interest rate environment, perhaps because gold itself
has become less popular and possibly also because the banking industry, both
central and bullion, has decided to bring gold-related strategy. Besides that, he
also considerable interest from US pension fund in investing in gold as the perfect
According to Nuradli Ridzwan Shah Mohd Dali & Norhayati Mat Husin (2004)
found that in the gold dinar economy, interest rate is strictly prohibited since the
nature of Gold Dinar prevents itself from being compounded. This is because;
Gold Dinar will only be as one gold and can’t be compounded. The reason is
because gold could not be created at will as compared to fiat money. Therefore,
gold dinar could only be increased from real gold production such as the
exploration of new gold mining and production of gold. This is important to keep
THE RELATIONSHIP BETWEEN PRICE OF GOLD AND INFLATION RATE,
INTEREST RATE (BLR) AND EXCHANGE RATE
the value of gold from drop too low in market. Besides that, in their study its focus
on explore the impacts of the gold dinar on the economic social order and their
discipline corporate society. Gold dinar also one of gold investment that trade in
Malaysia. Gold dinar has been introduced and encourage by our former Prime
A study done by Andreas Schabert (2005) that focus on analysis of the relation
financial market. In his study, he found that, the equilibrium relation between
money growth and interest rates in a framework with segmented financial markets
and flexible prices is examined. The result is hence a nominal interest rate target
that rises with inflation, is associated with money growth rates also rising with
inflation. As long as prices are flexible, forward-looking interest rate rules and state
contingent reaction functions for the money growth rate can further be equivalent,
in the sense that the fundamental solution to the rational expectations equilibrium
According book Gold ,Nathan Lewis, 1971 pg 202, The low interest rate common
during times of stable money are a genuine economic advantage, but the effects
of lowering interest rates through the oversupply of base money and the
devaluation of the currency amount to little more than the inflationary boom, mal-
investment, and the money illusion. The money illusion could indeed temporarily
happened in Germany in the early 1920s. The persistence of such fallacious ideas
through the decades after World War II was mainly due to the fact that their
supporters were not able to carry them out. The international gold standard, still
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INTEREST RATE (BLR) AND EXCHANGE RATE
operating through the Bretton Woods system, prevented such policies from
Every transaction of trade in this world will be recorded in the balance payments
requires an exchange of one country for that of another. Because of that, current
exchange rate is important when trading is involved with more than one country.
Exchange rate is the number of units of one nation’s currency that equals one unit
of another nation’s currency (Economic for today, Irvin Tucker, 2003, pg 674).
international forces of supply and demand. The equilibrium exchange rate will
that, UK firms stock returns are more affected by changes of US$ European
currency unit exchange rate. Besides that, they also found in this study that
exchange rate exposure has a more significant impact on stock returns of the
large firms compared with the small and medium-sized companies. That shown,
changes in exchange rate will affect stock return performance. This is because,
exchange rate one of the main element investor need identified before make a
market, it will involve many countries that trading that stock, so investor need to
According to Kuan-Min Wang and Yuan-Ming Lee (2010) that study focus on to
examine whether the gold price adjusts to the exchange rate fluctuation and also
whether the gold returns reflects the exchange rate fluctuation, and this study
focus in Japan (Yen). Based on this study, they found that the hedging relationship
between the gold price and the yen/dollar exchange rate is nonlinear. Besides
that, they found, different fluctuation levels of the yen have a different effects on
one commodity that people like to trade in this world. Even though gold is metal
that have higher demand in market, it still must be trade based on foreign currency
and it’s also depend on the exchange rate that post by that country. Some
economist said, gold is serve as exchange rate hedge, Generally, companies are
exposed to three types of foreign exchange risk, which are accounting (translation)
According to study that done by Grambovas and McLeay 2006 that found
exchange rate movements affect both the prices of imported finished goods and
the cost of imported inputs, thus influencing indirectly those companies that
firms want to avoid this problem because when changes in exchange rate will also
affect cash flow of those firms. Besides that, economic theory suggest that
changes in the exchange rate can produce a shift in stock prices, directly in the
case of multinational firms, exporting and importing companies, firms which import
part of their inputs and indirectly for other companies such firms.
A study done by Mu-Lan Wang, Ching-Ping Wang and Tzu-Ying Huang (2010)
that explore the impacts of fluctuation in crude oil price, gold price and exchange
THE RELATIONSHIP BETWEEN PRICE OF GOLD AND INFLATION RATE,
INTEREST RATE (BLR) AND EXCHANGE RATE
rate of the US dollar vs. various currencies on the stock price indices of the United
States, Germany, Japan, Taiwan and China. Based on their study, they found
those US stock market indices which indicate that there is no long term stable
relationship among the oil price, gold price and exchange rate and the US stock
market index. In addition, in Taiwan, oil price, stock price and gold price have two-
way feedback relations. Besides that, they found that, except United State the rest
of the group have one to two co-integration relationships which indicate that there
exist long term stable equilibrium relationship among the national stock index and
crude oil prices, gold price and exchange rates. Exchange rate from USD to NT is
leading the Taiwan stock prices; crude oil price is leading the exchange rates; gold
prices are leading the exchange rate; while gold price and the Taiwan stock prices
According to studied that done Oguzhan Aydemir & Erdal Demirhan (2009).
They investigate about the relationship between stock price and exchange rate.
They using data from 23rd February 2001 to 11th January 2008 and they found that
the result there is bi-directional causal relationship between exchange rate and all
stock market indices and also have a positive causal relationship from technology
performance. With a changes in exchange rate also will lead the changes
investment performance.
According to studied that done by Shehu Usman Rano Aliyu (2009) that
investigate the impact of oil price shocks and real exchange rate volatility on real
rate tends to expand exports and reduce imports and vice versa. Besides that,
based on this study, found that oil price shock has both income and output effect
on Nigeria economy, while exchange rate instability, besides its direct effect on
THE RELATIONSHIP BETWEEN PRICE OF GOLD AND INFLATION RATE,
INTEREST RATE (BLR) AND EXCHANGE RATE
foreign trade, was also found to have significant effect on output via investment. In
other words is oil price shock and appreciation in the level of exchange rate exert
positive impact on real economic growth in Nigeria. In one country it’s important to
get a higher economic growth; this is because to show to the world, that country is
stabilization. In addition, exchange rate of one currency in that country also helps
CHAPTER THREE
RESEARCH METHODOLOGY
This chapter was cover about the data and research methodology that used in this
study. It gave explanation about the data used, data collection method, data analysis,
research design, methodology, and also hypothesis that have been tested. In this
section, the researcher explained about the data used in this research. It explained
the method that is applied in this research or study in order to determine the result
3.1 DATA
For the purpose of determine of relationship price of gold towards inflation rate,
interest rate and exchange rate and the data is calculated from range year 2000 until
2010. For the independent variables, researcher used interest rate (IR), inflation rate
(INF) and also exchange rate (ER) that also calculated for the same year.
THE RELATIONSHIP BETWEEN PRICE OF GOLD AND INFLATION RATE,
INTEREST RATE (BLR) AND EXCHANGE RATE
The researcher collects data from secondary method. The secondary data collected
also refer to the information that already exists in the other sources such as company
records, and publication. Data for this research analysis are extracted from data that
The period of 11 years is decided because it possibly can show performance trends
in gold investment volume. Journals from libraries like Journal of Investment, Finance
and Gold Market, reference books, data from the data stream, Bank Negara Malaysia
Data for independent variables such as interest rate, inflation rate and exchange rate
are collected from world Gold Council, BNM and also data stream. Other than that,
the online searches of information via the internet search engine such as Google
Chrome, Google and Yahoo also being assessed to get the instant and update data
Data is analyzed using the statistical software known as Statistical Package for Social
Science (SPSS) version 16.0 for Windows in this study. This software is used to test
and process the quantitative data. The purpose is to analyze the data and to test the
relationship between price of gold and those factors that affects gold investment such
as interest rate, inflation rate, and also exchange rate. Trends of the data are
Research design for this study is to illustrate the relationships between these
variables. From the previous literature review, the researcher gets the idea to study
eleven years which is from 2000 to year 2010. The researcher develops the
independent variables are interest rate, inflation rate and exchange rate. This
research is base on secondary data that researcher collect from many sources. It
used to describe the relationship between the dependent variables and independent
variables.
The hypothesis will be tested whether it can be accepted or not by using the suitable
3.3 METHODOLOGY
1. Analyzing the trends of price of gold from year 2000 until 2010.
2. Analyzing the trends of price of gold, interest rate, inflation rate and
exchange rate.
rate.
THE RELATIONSHIP BETWEEN PRICE OF GOLD AND INFLATION RATE,
INTEREST RATE (BLR) AND EXCHANGE RATE
overall model.
determine how well the regression line fits the data. R2 value can be
determined from the model summary table in the regression analysis. The
3.3.3 ANOVAs
The ANOVA table presents a test of significant for the overall regression
less than 0.05. State that the F ratio is very high that represents a good
From the regression coefficient table, the researcher can determine the
variable and each of the independent variable, and also the most
Prior Relationship
The positive (+) sign by the coefficient show that the there is positive
and exchange rate). While the negative (-) sign by the coefficient show
According to Levin & Rubin (1998) Pearson Correlation is design to describe the
tool that can be used to describe the level of the variables that nearly related another.
This model will provide the information such as direction, strength and significant of
the relationship of all variables. The coefficient has range of possible value from -1 to
+1. The value indicates the strength of the relationship, while the sign (+ or -)
This method has been chosen because there is more than one independent variables
Y = α + β1 X1 + β2 X2 + β3 X3 + β4 X4+ Є
So:
Y = α+ β1 INF + β2BLR +β3ER + Є
Where;
Y = Price of gold
α = Constant variables
β = Parameter to be estimate
ER = Exchange rate
Є = Random error
THE RELATIONSHIP BETWEEN PRICE OF GOLD AND INFLATION RATE,
INTEREST RATE (BLR) AND EXCHANGE RATE
3.6 T-STASTIC
T-statistic is used to examine the null hypothesis and the alternate hypothesis,
whether there is significant difference between the dependent variables and each of
Table t-value:
df = n-k-1
df = degree of freedom
n = number of observation
If the t-statistic value is higher than significant level (p < α) failed to reject Ho
If the t-statistic value is smaller than significant level (p > α), reject Ho and conclude
H1
Confidence level will assure the significant level. If confidence interval level:
Durbin Watson test is the test for serial correlation which analyses the residuals of
the estimated regression line. It is used to test and to detect whether serial
correlations are present in error terms in regression, and to identify the presence of
autocorrelation.
When calculating the Durbin Watson, if the value of Durbin Watson is in the range
problem. However, if the calculated Durbin Watson is less than 1.5 and more than
2.5, it indicates that there is a problem in this time series, which means there are
period. If the Durbin Watson is higher than 2.5, this indicates the presence of
negative autocorrelation.
THE RELATIONSHIP BETWEEN PRICE OF GOLD AND INFLATION RATE,
INTEREST RATE (BLR) AND EXCHANGE RATE
CHAPTER FOUR