| The purpose of the research paper is to analyse the relationship between gold price and exchange rate.Regardless of how familiar the topic is,prior researchers ignored to analyse,using panel method the magnitude of the effects of gold price fluctuation on both gold producing and exporting countries as well as non-gold producing but gold exporting countries.To present a clear understanding on the relationship,the paper will analyse the relationship based on subgroup estimation,which includes the Gold Producing Economies and the Non-Gold Producing but Exporting Countries,developed and developing countries,and also countries using the managed floating regime and the free floating regime.The paper will employ different test,so as to check the variable’s consistence,as well as the model reliability.The test for panel unit root using the ADF test revealed that,all the variables were stationary at first difference at 0.05 significance level.The co-integration test followed and the paper rejected the null hypothesis of no co-integration.The Wald test,LM test and the F test,confirmed the significance of the parameters,as well as unobserved country specific effects.The Hausman test preferred the FE model,over the RE model,hence analysis on subgroup estimation was done using the FE model.Lastly,the Wald endogeneity test,failed to reject the null hypothesis that of variables being exogenous.Following different literature and concepts,the paper based its analysis on the theoretical assumption that of commodity-currency theory.Following results from the Fixed Effects model and the Random Effects model,the overall sample results showed a negative correlation between gold price and exchange rate.Thus,a 1%increase in gold price is associated with a 0.48%depreciation in exchange rate,in both accounts(FE and RE models).The significance of the gold variable on exchange rate confirms the existence of the commodity-currency concept in these countries,and also the results goes in hand with the expectancy theory and the denomination theory.Furthermore,difference in returms from inflation,interest rate and the terms of trade on exchange rate can be explained by the PPP theory,IFE theory,and the concept of comparative advantage.However,based on subgroup estimation,the estimates for GPE countries reveals a positive association between exchange rate and gold price,and a negative association between the variables for N-GPE countries.In addition,coefficient estimates for developing and developed countries exchange rates,respond differently to an increase in gold price,in the sense that,as gold price increase,exchange rate for developing countries increase as well,but exchange rate for developed economies fall in value.This can be so since,most developing countries are rich in resource(gold)and through the resource endowment and comparative advantage concept,they have managed to diversify their exports,and connected through the terms of trade,naturally exchange rate will appreciate.Most developing countries should make sure they polish their trade policies as well as controlling their balance of govermment expenditure,as these pose a threat to their exchange rate values.Also allowing currency to free float will allow the gold price and exchange rate to have a direct relation.Furthermore,the paper stated that,the difference in the value of returns in gold price can be explained using the PPP theory and or IFE theory.Thus,according to the PPP and the IFE theories,returns from international trade are affected by factors like transaction cost,degree of trade openness,and other cost associated with carrying out international trade transactions.The obvious difference eomes as a result of difference in quantity exported by a country.We also have to factor in other factors like inflation,interest rate,GDP per capita,government spending,to mention a few which have a direct effect on the link between exchange rate and commodity price.According to the empirical result,the difference also comes as a result of whether the country is either gold producing as well as gold exporting and also if a country is a non-producing but gold exporting country.Conclusively,gold price fluctuation has a greater impact on exchange rate,the magnitude,however,depends on different factors.As such,it is important for countries under review,to be proactive and exercise due diligence,when it is comes to the relationship between the two variables.For companies wishing to invest in gold either in gold production and or gold market,results from be research can help such an investor make informed decision.In addition,policy makers can help from such an understanding as,the difference between a countries currency appreciation and or depreciation relies on having an understanding of the relationship between gold price and exchange rate plus other variables. |
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