CHAPTER ONE INTRODUCTION 1.0 BACKGROUND OF STUDY …nuradli.com/proposal_2008586069.pdf · There are: Maybank, UOB bank, Dinar Emas Klantan, Public Fine Gold International Sdn Bhd

THE RELATIONSHIP BETWEEN PRICE OF GOLD AND INFLATION RATE,

INTEREST RATE (BLR) AND EXCHANGE RATE

CHAPTER ONE

INTRODUCTION

1.0 BACKGROUND OF STUDY

1.01 OVERVIEW INVESTMENT IN MALAYSIA

According to Wikipedia, Investment is putting money into something with the

hope of profit. More specifically, investment is the commitment of money or

capital to the purchase of financial instruments or other assets so as to gain

profitable returns in the form of interest, income (dividends), or appreciation

(capital gains) of the value of the instrument.

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

fund, money market investment, insurance investment and also property

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

choice as the returns are lower compared to other types of investments.

However, fixed deposits are perceived as the most stable form of

investments as they are guaranteed by the bank as well as the central bank

of the country.

http://en.wikipedia.org/wiki/Money

http://en.wikipedia.org/wiki/Interest

http://en.wikipedia.org/wiki/Income

http://en.wikipedia.org/wiki/Dividends

http://en.wikipedia.org/wiki/Capital_gains



Bond is investment that uses a term and maturity to make sure the investor

get their return. This type of investments is seen to be more stable as

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

bonds changes accordingly to the volatile interest-rates and investor should

wait for the bond to mature, otherwise investor will have to surrender to the

market rate which might or might not be profitable at all.

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

should buy shares for long term investment purposes.

Unit trust or mutual fund is also one of famous investment and it is most

widely acceptance. Unit trust is pooled money from a thousand maybe a

million people and these funds are all handled by professionals and experts

under one particular investment account. The return of this investment is all

depend on the economy condition and the management of that fund.

Money Market Investments is usually backed by the government, money

market investments are typically similar to fixed-income investments where

the investor will receive a pre-determined income amount over a specified

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.



Insurance investments these are like insurance policy which includes some

form of mutual fund investments to accelerate and expedite the exponential

increment of investor policy. The conventional insurance requires you to

consistently contribute to investor policy with a specified figure at the end of

your term.

Property Investments is the one of the ‘safest’ investments as regarded by

most people, property investments are most popular and are seen as long

term investments.



1.02 OVERVIEW INVESTMENT GOLD IN MALAYSIA

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

also has industrial uses in addition to being used to make money or

jewellery. Gold also is an ideal value keeper. It can be kept for future use

and will not be obsolete like fiat money.

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.

Investing in gold is practice of the affluent. Based on history of 5000 years is

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

still maintain and keep increasing day by day.

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 double in every 5 years, or there is a 100% return on gold

investment. Gold investment is safest form of investment, because 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

instrument like bond and share.

It can be proof by sunnah from our Prophet Nabi Muhammad s.a.w:

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

and a dirham." (The Musnad of Imam Ahmad ibn Hanbal)

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

Dinar offers very competitive rates for purchasing gold Dinar.

Beside that, in Malaysia, former Prime Minister Tun Dr. Mahathir Mohamad

become a leading voice in advocating the use of gold dinar in international

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

grouping had agreed to Malaysian proposal to use the gold dinar in

international trade.

In Malaysia, only five organization or company that apply gold as an

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

gold by open an account (gold saving account).



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

ring, bracelets and also necklace.

Under gold saving account, in Malaysia there are two banks that apply this

investment, which is Maybank: Gold Saving Passbook Account (GSPA) and

Public Bank: Gold Investment Account (GIA).



1.1 PROBLEM STATEMENT

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

gold disappointed. Besides that, gold also is good medium to invest.

Whether that gold investment in physical or certificate or in term of stock or

maybe derivative. Actually gold investment has been practice by investor a

long time ago.

Investing in gold is practice of the affluent, history of 5000 years is proof 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

investment which is dependent on other factors of market demands.

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

standard (value of money depend on gold) in the 1920s and 30’s.

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

finally put a stop to the great bull market in gold.



The gold price sank for the next 20 years, falling lower as the world

monetary system stabilized. Debt, credit and high-growth share thrived as

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

already making strong and solid move higher.

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

holding cash investment such as government bond and to move something

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

influence the price of gold keep increasing?



1.2 RESEARCH QUESTION

According to Wikipedia research question is the methodological point of

departure of scholarly research in both the natural sciences and humanities.

It is the question which the research sets out to answer. At an

undergraduate level, the answer to the research question is the thesis

statement.

Based on this study the research question is:

“Does price of gold will be affected by inflation rate, exchange rate and

interest rate?”



1.3 RESEARCH OBJECTIVE

The objective of the research is what the research intend to accomplish when

researcher design the research. The objective of this study is:

1) To analyse the trend of price of gold for eleven years from 2000

until 2010.

2) To examine the relationship of price of gold with inflation rate,

exchange rate, and interest rate.

3) To examine what the main element between three, independent

variable are influence to price of gold in eleven years.



1.4 THEORETICAL FRAMEWORK

Theoretical framework is a logically developed, described, and explained network of

associations among variables of interest to the research study. The theoretical

framework discusses the interrelationship among the variable that are deemed to be

integral to the dynamics of the situation being investigated. Developing such as

conceptual framework helps us to postulate or hypothesis and test certain

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)



DEPENDENT VARIABLES INDEPENDENTVARIABLES

INFLATION RATE

PRICE OF GOLD

INTEREST RATE

EXCHANGE

RATE



1.5 HYPHOTESIS

A hypothesis is an educated conjecture about the logically developed relationship

between two or more variables, expressed in the form of testable statement. Beside

that hypothesis is a tentative statement or a pre-conceived idea made by a

researcher regarding the underlying problem in that research.

According Wikipedia, a hypothesis is a proposed explanation for observable

phenomena. A hypothesis is a declarative statement made by researcher whereby

they would prove it with empirical evidence.

There are two hypotheses which are Null hypothesis and Alternate hypothesis. Null

hypothesis is the conjecture that postulates no differences or no relationship between

or among variables. Alternate hypothesis is an educated conjecture that sets the

parameters one expects to find. The alternate hypothesis is tested to see whether or

not the null is to be rejected.

The hypothesis of this study as follow:

Hypothesis 1

Ho: There is no relationship between inflation rate and gold prices.

H1: There is a relationship between inflation rate and gold prices.



Hypothesis 2

Ho: There is no relationship between interest rate and price of gold.

H1: There is a relationship between interest rate and price of gold.

Hypothesis 3

Ho: There is no relationship between exchange rates and price of gold

H1: There is a relationship between exchange rates and price of gold.



1.6 SCOPE OF STUDY

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.

Besides that, the return of gold investment it’s favourable.

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

the main factors that influence changes in price of gold.



1.7 LIMITATION OF STUDY

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

password can read the journal.

2) Lack of knowledge and exposure in the scope of research.

The researcher faces problem due to lack of knowledge. Secondary data

used requires the researcher to have skills in arrangement of data to

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

approaches applied and affect the outcomes of study conducted. Critical

thinking is used in order to make research valuable and worthwhile. It

gives challenges to researcher in completing the research.

3) Time constrain.

More time is needed to make investigation about topic of research to

ensure it is within the scope of study. The researcher needs a skill in

manage time systematically because this project paper has only less than

four months before due date.



CHAPTER TWO

LITERATURE REVIEW

2.0 LITERATURE REVIEW

Nowadays, people more expose to the investment. There is several type of

investment. In Malaysia has offered fixed deposit, bond, stock or share and unit

trust as an investment. Besides that, in Malaysia also offer gold as an investment.

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,

interest rate and exchange rate toward price of gold.

2.1 GOLD INVESTMENT.

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



they (gold and silver) are immune. That shown gold is actually a metal that have

a high value even before century.

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

Malaysia also uses gold as a guideline to measure paper money. It also

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.

Fiat money is extremis is accepted by nobody but gold is accepted by other

people in every country.

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

trust. Recently, people like to invest in gold.

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



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

other word; the increasing is 27% every year.

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,

celebrities, individuals, guardian and also straight arrows. Thirdly is consumer

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

investment to tackle new investor.

According our former Prime Minister Dr Mahathir Mohammad (1997) that

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

Gold Dinar Convention mentions that Gold Dinar is alternative international

payment settlement through the Bilateral Payment Arrangement (BPA) with

cooperation from central banks to avoid the currency crisis from recurring.

Besides that, gold dinar investment can be purchase in Malaysia at Dinar Emas

Kelantan organization as an investment.

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



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

durable, relatively transportable universally acceptable and easily authenticated.

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

dollar will be fall.

2.2 PRICE OF GOLD

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

investment is a safer form of investment. Investment in gold is actually depending

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

because of the price of gold is keep rising.



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

a percentage increase in gold price returns as opposed to investors holding gold

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



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

gold bullion and coin in bull market.

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



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

gold price will affect market return performance.

2.3 INFLATION RATE

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 %



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

commodity prices in their cyclical swing.

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

1970s. A modified cointegration method incorporating these breaks indicates that

a strong cointegrating relationship exists between gold and inflation suggesting

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.



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

investment will be high.

A study done by Siti Rahmi Utami & Eno L.Inanga (2009) they analyses the

influence of interest rate differential on exchange rate changes based on

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

differentials have negative significant influence on changes in exchange rate for

Japan. Besides that, regression result show that, inflation rate differential has

positive significant influence on interest rate differential, in simple meaning is when

inflation rate differential increase, the interest rate will also increase. Overall,

inflation rate differential have positive significant influence on interest rate

differential.



2.4 INTEREST RATE.

Interest rate in economic means the consumption schedule includes the option of

borrowing to finance spending. A lower rate of interest rate on loan encourages

consumers to borrow more, and a higher interest rate discourages consumer

indebtedness. If interest rates fall, household may use more credit to finance

consumer purchases. The result is a shift upward in the consumption schedule

(Irvin Tucker, Economic Today, 2003 pg 429).

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

element in measure an investment performance.

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

because change in interest rate can affect an investor holding portfolio.

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



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

hedge for their equity holding.

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 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

variable on wealth accumulation, reducing dependency on debts, creation of

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

Minister, Dr Mahathir Mohammad.

A study done by Andreas Schabert (2005) that focus on analysis of the relation

between money supply and interest rates targets is conducted in a general

equilibrium model with standard money demand specifications and frictionless

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

under both policy description are identical.

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

lower unemployment, but only at the cost of eventual hyperinflation, as had

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



operating through the Bretton Woods system, prevented such policies from

reaching their natural conclusion.

2.5 EXCHANGE RATE

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).

The exchange rate of dollars or any nation’s currency is determined by

international forces of supply and demand. The equilibrium exchange rate will

happen when point supply face with point of demand.

According to Ahmad El-Masry and Omneya Abdel-Salam, (2007) they found

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

decision to invest. When we invest in certain form of investment such as stock

market, it will involve many countries that trading that stock, so investor need to

calculate the foreign currency with using exchange rate.



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

the effectiveness of gold as a hedge against exchange rate depreciation. Gold is

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)

exposure, transaction (commitment) exposure and economic (operational,

competitive or cash flow).

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

compete with Economic exposure is computed as the net sensitivity of some

aggregate measure of firm value to currency fluctuation. Because of that, many

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



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

are mutually independent.

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

indices to exchange rate.Exchange rate is important to see the stock or investment

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

economic growth in Nigeria. In his study mention that depreciation of exchange

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



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

developing country and strong in term of economic condition, or market

stabilization. In addition, exchange rate of one currency in that country also helps

that country to achieve a higher in economic growth.



CHAPTER THREE

RESEARCH METHODOLOGY

3.0 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

and analyzed the data.

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.



3.1.1 DATA COLLECTION METHOD

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

reported of data stream for the period 2000 until 2010.

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

(BNM) also article in internet in relation to the gold investment.

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

used as sources of information.

3.1.2 DATA ANALYSIS

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

executed using the graph in Microsoft Excel 2007.



3.2 RESEARCH DESIGN

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

on determinants of internal and an external factor of performance gold investment for

eleven years which is from 2000 to year 2010. The researcher develops the

theoretical framework in Chapter 2. Dependent variable is price of gold and

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

statistical method. Statistical method offers an enhanced understanding of the

relationship that exists among variables.

3.3 METHODOLOGY

The research methodology was initiated by:

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.

3. Identifying the relationship between dependent variable price of gold,

and independent variables interest rate, inflation rate and exchange

rate.



3.3.1 MULTIPLE REGRESSION ANALYSIS

In multiple regression analysis, the researcher will explain about:

1. R2 in the model summary table.

2. ANOVAs (Analysis of Variance) that indicate the significant of

overall model.

3. The regression model, the significant relationship between

dependent variable and each of independent variable, and also the

factors that contribute most to dependent variable; that come from

regression coefficient table.

3.3.2 COEFFICIENT OF DETERMINATION (R2)

According to Salvatore D. (2004) the more relevant independent variable

is included in the regression; we generally expect a larger proportion of

the total variation in the dependent variable to be explained.

Coefficient of determination is also known as R2 that will represents how

many percentages of changes in the dependent variable can be

explained by the changes in the dependent variable. R2 is used to

determine how well the regression line fits the data. R2 value can be

determined from the model summary table in the regression analysis. The

value of R2 ranges from 0 to 1. If the value of R2 is 0, it shows that none

of independent variables explain the variation in the dependent variables.

If R2 is equal to 1, it means that all the changes in the dependent variable

are being explained by the changes in independent variables which are

interest rate, inflation rate and exchange rate.

R2 equals to Total Explained Variation divided by Total Variation.



3.3.3 ANOVAs

The ANOVA table presents a test of significant for the overall regression

model. It is measured from the significance of F-value in this table. To

determine whether the overall model is statically, the F-value should be

less than 0.05. State that the F ratio is very high that represents a good

model with 1% significant level.

3.3.4 REGRESSION COEFFICIENT ANALYSIS

From the regression coefficient table, the researcher can determine the

regression model, the significant relationship between the dependent

variable and each of the independent variable, and also the most

determinant that relationship between price of gold and inflation rate,

interest rate and exchange rate.

Prior Relationship

The positive (+) sign by the coefficient show that the there is positive

relationship between DV (price of gold) and IV (interest rate, inflation rate

and exchange rate). While the negative (-) sign by the coefficient show

that there is negative relationship between DV and IV.

Value of coefficient indicates how many changes in independent variable

affect changes in dependent variable.

Value of the coefficient

Coefficient of independent variable is negative value. If dependent

variables increase by 1%, the independent variables decrease by 1 %.



Coefficient of independent variable is positive value. If dependent

variables increase by 1%, the independent variables increase by 1%.

3.4 PEARSON CORRELATION

According to Levin & Rubin (1998) Pearson Correlation is design to describe the

relationships between Dependent Variable and Independent Variables. It acts as a

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 -)

indicates the direction.

Coefficient of correlation Interpolation

r = 1

0.5 < r < 1

0 < r < 0.5

r = 0

-0.5 < r < - 0

-1 < r < -0.5

r = -1

Perfect positive linear correlation

Strong positive linear correlation

Weak positive linear correlation

No linear correlation

Weak negative linear correlation

Strong negative linear correlation

Perfect negative linear correlation

Table 1: Coefficient of correlation



3.5 REGRESSION MODEL

This method has been chosen because there is more than one independent variables

involved. The estimated Multiple Regression Model should be follows:

Y = α + β1 X1 + β2 X2 + β3 X3 + β4 X4+ Є

So:

Where;

Y = Price of gold

α = Constant variables

β = Parameter to be estimate

INF = Inflation rate

BLR =Interest rate (Base Lending Rate)

ER = Exchange rate

Є = Random error

Y = α+ β1 INF + β2BLR +β3ER + Є



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

the independent variables.

Calculated t-value = Absolute value of coefficient

Standard error of coefficient

Table t-value:

df = n-k-1

df = degree of freedom

n = number of observation

k = number of independent variables

Using significant level

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:

90% then significance level will be ≤ 0.1 (α = ≤ 0.1)





3.7 DURBIN WATSON TEST

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

between 1.5 and 2.5, it indicates that there is no existence of autocorrelation

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

difficulties of a serial correlation between observations made in the successive

period. If the Durbin Watson is higher than 2.5, this indicates the presence of

negative autocorrelation.



CHAPTER FOUR

FINDING & ANALYSIS

Documents

CHAPTER ONE INTRODUCTION 1.0 BACKGROUND OF STUDY …nuradli.com/proposal_2008586069.pdf · There are: Maybank, UOB bank, Dinar Emas Klantan, Public Fine Gold International Sdn Bhd