| It has been almost three years since the financial meltdown exploded in early 2008, and concerns about the double dip start to haunt investors. It cause much concern about the financial situation of the United States that high unemployment keeps steady at 9.6% and the deficit settles new records. The deficit has settled the record at 1.6 trillion US dollars by the fiscal year 2010, one tenth of the gross domestic product of the USA. In Europe, the sovereign debt crisis gets worse, with other EU members, including Spain, Portugal and Italy, suffering from the debt crisis, which led to a crisis of confidence. So in order to get the economies back on the track, the United States and the Euro take actions including a series of economic stimulus policies. Although the GDP grows 11.1% in first half of the year 2010; it is not sustainable for the leading drive force of the economy is still investment. The world's economy still looks uncertain.Investors get welcome returns from the gold market though some get losses in other markets. The price of gold in London market surged to 1232.92 US dollars at June 2010 from 754.6 US dollars at October 2007. The gold demand in US dollars increased by 77 percent in the first half of the year 2010; among which the derivatives investment, mainly ETF, reaches up to 567 percent. In the future market, the volume of the COMEX gold future has grown by 48 percent, up to more than 23.35 million contracts in the first half year of 2010. The volume of gold traded in SGE (Shanghai Gold Exchange) increases by 56.72 percent to a total of 3171.57 ton, among which 834.59 tons are contributed by spot gold with growth by 48.49 percent, and 2332.17 tons by AU (T+D) growing by 79.16%. It has been almost three years since the first gold future contract launched by SGE. Whether the gold future market shows us good performance with the fulfillment of its function? And how it works that the spot price and future price interacts with each other? The empirical analysis next will offer the answer.The purpose of the first chapter is to summarize the previous studies on the price discovery function of the gold future market. Firstly, the chapter reviews the literature on the definition of the price discovery, and the attention is paid to the lead-lag relationship between the spot price and future price. Next is the literature review of the lead-lag relationship between the spot price and future price, from foreign literatures to domestic studies, firstly other commodities and then gold we study in this paper. Finally, the focus is centered on the empirical methods, from the least square method firstly used by scholars but with significant drawback to the co integration and Error Correction Model (ECM) applied mostly in recent studies, also in this paper.The second chapter studies the theory, the base for the empirical study. In the first section, the paper offers the definition of price discovery, the basic consideration of the study, that the price discovery is the lead-lag relationship between spot price and future price. The second section studies how the future market works to absorb the information and embody it in price, and the attention is paid to Transaction Cost Theory. Finally, the paper analyses the factors contributing to the efficiency of the future market taking the cost, liquidity and regulation efficiency into consideration, which lays foundations for the cause analysis in latter chapter.The introduction of the domestic and foreign gold markets in the third chapter is to get the knowledge of the gold future market and offer the reason for the data selected for the empirical study. Then find out the factors contributable to the move of the gold price, among which the secular factors work to affect the supply and demand of the gold, and the temporary ones used to make dynamic analysis with VAR (vector autoregressive model), including interest, foreign exchange, UDI (Us Dollars Index) and commodity price indicators, are the force to drive the fluctuation of the gold price.In the fourth chapter, the paper studies the models and methods used in the empirical analysis. Unit root testing is used to test the stability of the time series, and if stable, then co integration could be applied to make long term equilibrium analysis. With time series stable, Granger causality test can tell us the lead-lag relationship between spot price and future price. Another critical model is the VEC taking the variables from VAR into consideration, and impulse response and variance decomposition are available for further study. This chapter is the core of the whole paper for all other parts are prepared to serve the empirical analysis. Firstly, the paper studies the price discovery in the foreign gold markets then in domestic markets respectively. Then VEC model is used to analyze the price discovery and dynamic move the price in domestic gold future market. Final is some advice with the reason got from the empirical study.The final chapter is to summarize the whole thesis, and give the conclusions:Being the gold future price maker, the New York gold future market gets information firstly with reaction in price, and then spreads the information to spot gold market. By contrast, the role is played by Shanghai gold spot market other than future market, and the influence future price toward the spot price is weak.The contribution to the price discovery from UDI is much more than that of interest and SSE Composite Index. And we find the gold market in China works better than before, but the dominant role is the spot market, which indicates the Shanghai gold future price is driven by the foreign gold market and other factors while domestic market contributes little.Above analysis tells us the Shanghai gold markets are not on the right track right now, and we find the reason for the performance is cost, liquidity and regulation. However, we should put risk at first place for the gold market, especially the future market is just on the way, the best choice is to learn and build the markets taking the local factors into consideration. And for investors, mainly those lack of experience, the fluctuation in future market is much more volatile, be cautious. |
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