THE CHANGE OF INVESTMENT CONCEPT AND ENVIRONMENT WITH THE FLUCTUATION OF GOLD PRICE

Background of the weak gold price in the 1990s

Economic globalization exerts profound influence on world economic development. Gold price was greatly affected by such issues as the violent fluctuation of the USD/JPY exchange rate, Mexico's financial crisis, Asian financial turmoil, Turkey's financial crisis, financial turbulence in Latin America, and the issuing of Euro. The following two causes account for the sharp fall of the world gold price in the1990s.

Weakened functions and roles of gold

For a rather long period, gold had performed one of the essential functions of currency --- measure of value. However, in the modern economy, fiat money has replaced gold by performing all five functions, i.e., measure of value, medium of circulation, means of payment, means of reserve and world money. Gold is resuming its original role of precious metal.

Impacts from financial investment diversification

Since the 1980s, financial liberalization and the advancement of communications technology have accelerated the development of various financial markets and expanded channels and the scope of international investment and speculation. Due to the loss of the value adding function, gold price could hardly go up with only the value maintaining function. Besides, various direct and indirect investment means existing in the stock market and the forex market attracted a large amount of international capital and caused the decline of gold price.

Causes for the movement of world gold price

Impacts from the world economy and financial environment of the USA

Since gold price is marked in US dollar, the USA誷 economy and world financial environment have a remarkable influence on gold price. The economic recession in the USA and the sluggish world economy have enlarged the rising scope of gold price.

Impacts from the FED activities and the exchange rate of USD

The consecutive interest rate cut by the FED is beneficial to the stability of the USA誷 economy and the increase of USD assets share, which restricts the rise of gold price. At the same time, the market anticipation of the drop in the USD exchange rate and the difficult choices regarding interest rate policies by the FED, provided certain room for gold price rising in short term.

Impacts from the world inflation

At the end of 2001, worldwide inflation continued to decrease, hindering the rise of gold price. However, international oil price fluctuates severely, so the potential inflation risks may stimulate a technical rebound of gold price.

Impacts from contingencies in the world

Contingencies in the world, such as the terrorist attack on last September 11, increase the uncertainty of economic anticipation. The value maintaining function of gold stands out under such circumstances and its price goes up correspondingly.

Anticipation of world gold price and China's countermeasures

World gold price is expected to remain weak with more violent fluctuation. The risk aversion function of gold will be impressive in the short term, but will continue to weaken in the long run. World gold price will remain between US$270 to 300 per ounce with the highest price reaching US$320 to 340.

Confronted with the fluctuation of world gold price, on one hand, importance should be attached to the standard, international and legal construction of China's gold market, improvement of the related supervisory system, and an increase in market transparency. On the other hand, gold price should be adjusted timely according to the tendency of international gold price, so as to avert risks. Meanwhile, diversified instruments and approaches should be developed and introduced to activate the gold market, and further promote and guarantee economic and financial performance. All these efforts will accelerate the integration of China's gold market into the international market system.

(by Tan Yaling, Associate Professor, Research Institute of International Finance, Bank of China)