The Bucharest University of Economic Studies

Master in Financial Management and Capital Markets-DAFI

The evolution of gold and its role in the stability of the EUR / USD

Scientific Coordinator: Ph.D Professor Ion Stancu Student: Negrut Radu

2012 INTRODUCTION

Gold's role, although altered, is very important as the gold is still used to store money as investments in coins and bullion, ETFs (Exchange Trade Funds), futures or option, warrants, gold accounts for specialized banks gold, physical gold savings plans, shares in mining companies and gold mining, gold certificates, gold investment funds oriented and structured products. Over time, London was the most important traditional market where gold transactions took place. The price was set for the first time in 1717 to 4.25 pounds / ounce of gold at that time by the manager of the Mint, Sir Isaac Newton, in an unofficial form, and then in 1816 it was converted in the official one. In November 1961, a group of eight central banks from the United States, United Kingdom, Belgium, France, Italy, Netherlands, Switzerland and West Germany formed the London Gold Pool, in order to use its gold reserves as a mechanism to defend the price of $ 35 for an ounce of gold. Contributions of members in gold were - United States, 50%, 120t - West Germany, 11%, 27t - United Kingdom, 9%, 22t - France, 9%, 22t1 - Italy, 9%, 22t - Belgium, 4%, 9t - Netherlands, 4%, 9t - Switzerland , 4%, 9t By 1965, this fund dealt with an increasing difficulty in balancing the price of gold, using gold reserves by repurchasing. Excessive inflation of the U.S., largely due to the financing of the Vietnam War, led the United States to the outcome that they may not be able to redeem gold for maintaining order of importance, as the world's gold reserves also increased in this
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Jake Towne (2009-06-14), R.I.P - The London Gold Pool, 1961 - 1968, 2001, pag. 77

relationship and the U.S. deficit reached $ 3 billion. Given the facts, the London Gold Pool was under increasing pressure to failure, causing France in 1967 to withdraw from the agreement and move a large amount of gold from New York to Paris. British devaluation of 1967, followed by another gold rush and an attack on the British pound was one of the arrangements which led to the collapse of the London Gold Pool. On March 14th, 1968, the U.S. asked the British Government to close the London gold market in the next day, as a response to the strong demand for gold. However, it remained closed for the next two weeks, these events putting an end to the London Gold Pool. Given the historical events and the role of gold in the international financial system, with its implication in the exchange rate stability and the efforts to maintain it, a couple of question rise:

1) What is the current role of gold in the financial world? 2) Can gold be considered a stabilizing tool for the exchange rate EUR / USD? Gold is a reserve currency in times of financial crisis or war, making it safer against the devaluation of currency. Currently, much of the world's countries have reserves of gold. According to recent statistics of the Gold Council, the largest holders of gold in their treasuries are the U.S. and Germany, two of the most powerful countries, who have managed to cope with economic crisis.

LITERATURE REVIEW OF PREVIOUS STUDIES

Literature on the gold market, including market futures, covered a very wide field of research. In the following pages I will list a number of factors which are known to influence the gold price steadily, and also the factors influencing the EUR / USD. More specifically, I will show how the stability of the euro is influenced by the fact that gold provides an alternative investment to the dollar. The euro has been considered since its creation a currency that is an "anti-dollar". This view was formed due to the belief that once investors are out of the dollar, they are seeking new opportunities to place money. From the investors point of view, if the U.S. economy is experiencing difficulties, the EU economy is more reliable, providing more favorable investment terms for the indicator "risk to reward." Jun Cai believes that the U.S. and the European Union macroeconomic data such as unemployment, GDP and inflation were those that determined the daily volatility in the gold futures market. Stephen J. Bailey examines the impact of money supply growth on price volatility. Another Christie-David's paper examines the macroeconomic impact of news on the price of gold, further claiming that you can predict what direction it will take 15 minutes after the announcement of the inflation.

OBJECTIVES
In this paper I want to clarify the role of gold in the stability of a state. Furthermore, I intend to find out why central banks buy gold in times of crisis. It seems that whenever a country has serious financial problems, gold was the currency of payment in supreme economic instability conditions that resisted every time. Examples are: -China sold gold in 1976 after the disastrous earthquake in Tangshan; -Italy in 1936 made a desperate call to all women to give their gold rings to Government to help it pay for the war in Abyssinia. -India did the same as Italy, making a call to holders of gold in 1963, when they fought against the invasion from China. The importance that governments attach to it every time, seeing gold as a true bastion of the nations prosperity is matched with the view of ordinary people worldwide, who see gold as an anchor against devaluation and hazard in times of war. In this paper I also wanted to show the impact of gold on the exchange rate EUR / USD, studying a number of factors which influence the gold price movements. Moreover, I intend to show how its volatility is closely related to European and American currency.

DATA DESCRIPTION AND RESEARCH METHODOLOGY

I will analyze the data collected and I will use as a tool a linear regression model, in order to study the link and the significance of the data series. Definition: Regression analysis deals with the description and evaluation of linkage between a given variable (called the dependent or explained variable) and one or more other variables (known as independent or explanatory variables) in order to estimate and predict the average value of the dependent variable,

knowing the values of the variables fixed Independence (fixed values as a result of repeated sampling).

The factors we will analyze in the paper are:

Dependent Variable: - The gold price; The data used in analysis of gold price movements were collected from the website of the London Gold Exchange, www.lbma.org.uk, using monthly closing prices and the resulting number of 120 observations for the period 2002-2011. Independent variables: - Quarterly GDP EU; The series data for GDP of the European Union were taken from the EU's statistics portal, Eurostat. The data used show a total of 40 quarterly observations for the period 2002-2011. - EU Import USA; EU imports coming from the United States were also taken from the EU's statistics portal, Eurostat. The data used show a number of 120 quarterly observations for the period 2002-2011. - Inflation USA; The U.S. data on inflation were taken from the website www.bls.gov. These are monthly data, with a total of 120 observations for the period 20022011. - M2 money supply M2 is a currency in circulation outside banks, overnight deposits and

deposits with original maturity up to two years. The data were taken from the European Central Banks website w ww.ecb.int. These are also quarterly data, with a total of 120 observations for the period 2002-2011. - Oil Oil prices were taken from the site www.opec.org. The data used are monthly, with a total of 120 observations for the period 2002-2011. - EU Reference Rate The data were taken from the European central banks site, www.ecb.int. The data used are monthly with a total of 120 observations for the period 20022011.

RESULTS
The regression analysis of the GOLD & EU GDP
The series data for the GDP of the European Union we took from the portal of EU statistics, Eurostat, are used with a total of 40 quarterly observations for the period 2002-2011. As regard to the quarterly GDP, one can observe that the correlation coefficient of only 0.206243 highlights the weak link on the given period between the dependent variable (the gold) and the independent variable (the GDP itself). The closer the correlation coefficient is from 1, the stronger the link is. The coefficient of determination indicates the proportion from the total variance of the dependent variable y, explained by the variation of independent variable x. For the given period, the value is too low to be very significant, 0.04536. F-test measures how well the independent variables explain the evolution of the dependent variable. Alpha "" represents the confidence threshold of 5%, which gives us clues about how accurate are the analyzed data. In our case, the p value is equal to 0.20166. In comparison to the relevance level, the P-value is superior. As a

consequence, the null hypothesis is accepted, which means that statistically, all the regression coefficients are considered insignificant (p <a).

The regression analysis of the Gold & EU Interest, Oil, M2 money supply, inflation USA, EU Import from USA
In our case, the effect upon the dependent variable is better felt when the influence comes from many decisive factors. In the above table, we can see a very high correlation coefficient of 0.9787, which means that the EU interest, oil, M2 money supply, inflation USA and EU imports from the USA have a very strong impact on the price of gold. R Square (coefficient of determination) shows the proportion of the total variance of the dependent variable gold, which is explained by independent variables, so that the estimated regression model is 0.958035. F-test, whose value is 1.00215 E-76, is measuring how well the independent variables explain the evolution of the dependent variable (p <). P-value is inferior to the given relevance level. As a consequence, the null hypothesis is rejected, which means that statistically, at least one of the regression coefficients is significant.

The regression analysis EUR / USD & GOLD

The data for the analysis were taken from the MetaTrader trading platform of the forex broker Admiral Markets. These are the monthly average closing prices for the period 2002-2011. We have a high correlation of 0.611131, which underlines a fairly strong connection between the two variables.In the given case the p value is equal to 2.07512-16, which means that the null hypothesis is rejected. As a result, we can conclude that statistically, at least one of the regression coefficients is significant.

CONCLUSIONS

The purpose of this thesis was to demonstrate the role of gold on the exchange rate EUR / USD and to highlight the importance that gold still has in the world economy. We chose the 2002-2011 period in order to make a longer term analysis of the decisive factors that influence the EU GDP, the EU interest, EU imports from USA, U.S. inflation, M2 money supply and oil prices have on gold. The same indicators have an impact on the exchange rate EUR / USD. The changes which occur in regard to these indicators frequently influence the exchange rate, reinforcing one of the currencies studied. Due to the European and American economic degradation, a change in these factors is expected. The gold has a well-established role in our culture. It has an assigned value which is seen every time the economy hits a new financial crisis. The advantages they offer are also recognized by the governments, who appreciate its protection quality against the devaluation of the currency. Considering the results data, we can conclude that, without doubt, these factors influence the gold price and the exchange rate EUR / USD, mainly due to the movement of capital from dollars into gold. This current economic situation leads to the increase or the decrease of the price of gold, strengthening the statement "gold is Bedrock".

BIBLIOGRAPHY
Sidney Pollard, The gold standard and employment policies between the wars-Debates in economic history, Ed. Methuen, 1970. Timothy Green, The new world of gold, Ed. Weidenfeld &Nicolson, 1982. Armand Van Dormael, The Bretton Woods Conference: Birth of a Monetary System, 1978. Francis J. Gavin , Gold, Dollars, and Power The Politics of International Monetary Relations, Ed. Universitz of North Carolina Press, 2003. Philip Judge , Lessons from the London Gold Pool", 2001. Jake Towne (2009-06-14), R.I.P - The London Gold Pool, 1961 - 1968, 2001. Adrian Douglas (2008-11-19), The second London Gold Pool is dying, 2008. Time Magazine , "Money: De Gaulle v. the Dollar", (1965-02-12) Richard Roberts, Sterling and the End of Bretton Woods,Ed. University of Sussex , 2006. Jun Cai, Yan-Leung Cheung ,Michael C. S., Wong , What moves the gold market? Journal of future markets, 2001. Stephen J. Bailey, The Reform of Local Government Finance in Britain, 1988. Christie-David, R., M. Chaudhry, and J.T.Lindley, The effects of unanticipated macroeconomic news on debt markets, Social Science Research Network. Pound in your pocket. BBC News. www.bloomberg.com www.imf.org

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www.ecb.int www.opec.org www.lbma.org.uk http://epp.eurostat.ec.europa.eu

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