The drivers of physical demand for gold

Abstract

Which factors drive the price of gold? Many papers have addressed this question from different angles; the answer depends on the researchers’ view and definition of the precious metal: investment asset, industrial asset, or a mixture of both? While most researchers focus on the influence of macroeconomic variables on the price of gold, this paper investigates the relationship between a set of macroeconomic variables and the physical demand for the yellow metal across a multitude of countries. Different panel and non-panel models are used and tested for goodness of fit in order to derive empirical insights into the drivers of physical demand. Results for total gold demand indicate a positive relationship with short-term yields and economic uncertainty, while the exact opposite is observed for industrial gold demand, where a positive relationship with economic activity is observed. Furthermore, results indicate a rising luxury demand linked to increases in national wealth, and towards a positive relationship between investment demand for gold and both inflation and economic uncertainty. More specifically, we break a common myth by proving that global investors protect themselves from inflation by investing into physical gold rather than through buying jewellery