Some concerns on Barclay's new Gold pricing model
Barclays Gold pricing model may not have added much new knowledge to those eagerly tracking gold market as an investment or from an academic perspective. A model is but a simplification of reality and perhaps Barclays model has visually and more descriptively tried to bring forth the importance of the most quoted variables by analyst
In theoretical as well as applied Economics, a 'model' is a simplification of reality- the most basic being demand and supply model. It tries to assess the impact of several independent variables on a dependent variable. Therefore, it looks quite surprising why Barclay's has plunged itself into applied economics to come out with a quantitative (econometric) gold pricing model which it hopes will be quite accurate than its methods of forecasting prices as it is usually the forte of the academicians.
According to Barclays, gold could witness an uptick in 2013 but thereafter face downward pressure in Q4. The average prices for 2013 would be $1394 per ounce however if Federal Fund rates are hiked then it could fall to $1229/Oz but if Fed tapering is delayed it could rise to $1482/Oz as early as october.
Gold prices are not just dependent on supply and demand but to host of factors that has some corelation to its status as currency, according to Barclays. The five major factors that influence gold prices are:
-Price Momentum: The percentage of trading days in a month when price up exceeds price down
-US Dollar Index: A weighted mean of the US dollar relative to its six major trading partners
-Physically-backed Gold ETP holdings:Physically backed gold ETP holdings Total exchange traded products that are backed by bullion and measured in tonnes, trackthe price of gold less administrative and storage costs
-Euro Stoxx Index:Euro Stoxx 50 Index An index of the eurozone stocks, provides a blue-chip representation of super-sectorleaders in the eurozone
-MSCI Emerging Markets (EM) Index:MSCI Emerging Market (EM) Index A free-float-weighted equity index that measures large and mid-cap representation across21 emerging market countries.
There is no doubt that some of the factors suggested above does have a significant bearing on gold prices but there is a fundamental flaw in Barclay's model- it is the fact that gold prices vary across seasons. There are times when it is moderate, weak and quite high and they are mostly related to Asian demand especially in India when prices rise sharply during festival and wedding season which begins from September.
Barclays analysis fails to take account of this in H2 2013, half of which is traditionally good for gold (September-November), so also silver. Even when it says fundamentals aren't very signficant price drivers, it has failed to take stock of a scenario if gold mine production falls drastically due to margin pressures or labour strikes and what impact it could have on market prices.
Barclays points out that, "...gold is sentiment driven, making it important to assess investor confidence. Large above-ground inventories (given that all the gold that has ever been mined still exists in some form) weaken the link between gold prices and the supply and demand balance.
It is a fact that gold demand remains robust in China, India and several emerging nations are witnessing tremendous growth in demand, something that could absord the the large inventories above ground and is unlikely that there could a supply-demand imbalance. Given the fact that there is a threat of supply disruption in South Africa, supply tightness could be higher on such an eventuality.
Barclays forecast model looks at three possible scenarios including a delay in Fed QE tapering, Fund rate hike and flows out of gold ETFs.
"We aimed to design a transparent gold price forecasting model to capture the main drivers of short-term price movements and to project the market price over a horizon of up to 12 months. The model combines the standard Ordinary Least Squares (OLS) regressions with a set of scenario analyses under different sets of conditions affecting the explanatory variables. This allows us quickly to establish alternative pictures of the short-term gold market aside from our fundamental and market analyses," according to Barclays.
However, in my view, the model should have forecast a scenario in which demand is muted even during the peak season (September- Nov or even January) and a situation where demand grows during this period as in previous years.
Barclays Gold pricing model may not have added much new knowledge to those eagerly tracking gold market as an investment or from an academic perspective. A model is but a simplification of reality and perhaps Barclays model has visually and more descriptively tried to bring forth the importance of the most quoted variables by analysts. But what if more than one factor or several multiple factors work in tandem, which in reality is not very difficult to happen.
Sumber : Google
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