The gold price determinants in Malaysia

Gold is one of the most precious metals which plays an important role in the development of monetary system. Today it is one of the reserve assets of central banks, and a financial instrument to investors in the market. Standing as an investment instrument that attracts investors, the factors of the gold price movement is significant to the investors in order to prevent losses. However, to date, there is no solid theory which can explain the gold price determinants. (Sun, 2018). In view of that, this empirical study sets out to identify the determinants of the gold price in Malaysian context by using the selected macroeconomic variables of inflation rate (CPI), Ringgit Malaysia exchange rate, silver price, and Brent crude oil price from 2000-2019. The study employs econometric techniques namely unit roots test, Johansen cointegration, and Vector Error Correction Model (VECM) within Granger causality. In long run, results from Johansen cointegration imply Malaysian inflation and Brent crude oil prices are significant and positively related to gold prices, while silver price is found significant and negatively related to gold prices. In addition, for short run, silver price is the only variable that is found to be statistically significant and positively impacting the gold price in short run. The long run Granger causality in VECM show bidirectional relationship among gold prices, inflation, and Brent crude oil prices in Malaysia. While unidirectional causalities are found running from MYR/USD exchange rate and silver prices to Malaysia gold prices; MYR/USD exchange rate and silver prices to Malaysian inflation; and MYR/USD exchange rate and silver prices to Brent crude oil prices. This study proposes the policy maker to formulate the appropriate economic and financial policies to regulate the inflow of gold due to bidirectional effect to Malaysian inflation rate and Brent crude oil price. Since gold as a hedge against inflation is justified in Malaysia, investors are suggested to diversify investment by combining gold with other portfolios such as bond or shares portfolio to reduce the risk.