RESEARCH PROJECT (BMBR5103) DETERMINANTS OF GOLD PRICE IN VIETNAM STUDENT’S FULL NAME : LE THANH TAM STUDENT ID : CGSVN00015024 INTAKE : March 2013 ADVISOR’S NAME & TITLE : A. PROF. NGUYEN PHAN September 2014 Advisor’s assessment . . . . . . . . . . . . . . . . Advisor’s signature ACKNOWLEDGEMENT Making a research is never easy. But what makes it fulfilling is the fact that there are people around who, without thinking twice are willing to lend their hands. To Dr. Nguyen Phan, our beloved adviser, for the unwavering support, guidance, and patience he has shown. To our families for their love, provisions, support, and understanding before, during, and after the research process. And to my classmates for providing the researches with amazing grace and wisdom that only they can give. With the abovementioned names, I would like to extend the utmost gratitude with all my hearts. TABLE OF CONTENTS LIST OF TABLES . LIST OF FIGURES ABSTRACT . CHAPTER 1: INTRODUCTION . 1.1. Problem statement . 1.2. Research Objective . 10 1.3. Research Questions . 10 1.4. Research scope 11 1.5. Research methodology 11 1.6. Data collection 12 1.7. Research structure . 12 CHAPTER 2: LITERATURE REVIEW . 13 2.1. Impacts of inflation . 13 2.2 Impacts of exchange rate 18 2.3. Impacts of demand and supply factors . 21 2.3.1. International market 21 2.3.2. Vietnam market 26 2.4. Gaps in literature . 29 CHAPTER 3: RESEARCH METHODOLOGY . 30 3.1. Data sources 30 3.2. Variables . 30 3.2.1. Dependent variable . 30 3.2.2. Independent variables . 30 3.3. Modeling specification 31 3.4. Methods of estimation . 32 3.4.1. Test for the statistical significance 34 3.4.2. Test for heteroscedasticity . 35 3.4.3. Test for multicollinearity . 35 3.4.4. Test for the assumption of normality . 36 3.4.5. Test for autocorrelation . 37 3.5. Hypotheses 38 3.5.1. Hypothesis – CPI . 38 3.5.2. Hypothesis – Interest rate . 38 3.5.3. Hypothesis – USD/VND Exchange rate . 39 3.5.4. Hypothesis – VN-Index 39 3.6. Limitation . 39 CHAPTER 4: EMPIRICAL RESULTS AND DISCUSSION 41 4.1. Test for the statistical significance . 42 4.1.1 Individual significant test: 42 4.1.2. Joint significance test 46 4.2. Test for heteroscedasticity . 48 4.3. Test for multicollinearity . 49 4.4. Test the assumption of normality 49 4.5. Test for autocorrelation . 51 4.6. Interpretation of regression results 52 CHAPTER FIVE: CONCLUSIONS 58 5.1. Limitation . 58 5.2. Suggestion 58 5.3. Recommendation 59 5.4. Conclusion 60 REFERENCES . 62 APENDIX 1: Data of variables from January 2009 to June 2014 66 APENDIX 2: Global and Domestic Gold Price in Vietnam 70 APENDIX 3: Recent Gold Price Developments: May 2012 – March 2013 . 71 LIST OF TABLES Table 1: Gold Companies in the Forbes Global Top 2000 21 Table 2: Gold production countries from mining in 2013 22 Table 3: Global mine production of gold from 2005 to 2013 (in metric tons) 23 Table 4: Consumer demand Viet Nam four quarter totals (tons) in 2008-2013 . 27 Table 5: The result of individual significant test on CPI 42 Table 6: The result of individual significant test on VN-Index . 43 Table 7: The result of individual significant test on Exchange rate 44 Table 8: The result of individual significant test on Interest rate 45 Table 9: The result of joint significant test . 46 Table 10: The result of Test for heteroscedasticity . 48 Table 11: The result of Test for multicollinearity . 49 Table 12: The result of Test the assumption of normality 50 Table 13: The result of Test for autocorrelation . 51 LIST OF FIGURES Figure 1: Movements of Vietnamese gold price and nominal interest rate from 01/2009 to 06/2014 . 52 Figure 2: Movements of Vietnamese gold price and USD/VND rate from 01/2009 to 06/2014 53 Figure 3: Movements of Vietnamese gold price and Vietnamese Consumer price index (CPI) from 01/2009 to 06/2014 . 54 Figure 4: The movements of Vietnamese gold price and VN-Index from 01/2009 to 06/2014 55 ABSTRACT With the investment demand for gold being on the rise, and a complex set of factors influencing the investment demand for gold, forecasting the price of gold is seen essential but difficult. In addition, although Vietnam gold prices have a huge influence from world prices but still have negatively correlated in some periods. The paper makes an attempt to identify the factors influencing the price of gold by using the monthly prices of gold for the period from 2009 to 2014. The paper then tries to identify the factors influencing the price of gold using the multiple regression analysis. The researcher used four independent variables that affect the prices of gold in Vietnam which are Vietnamese consumer price index, exchange rate, interest rate, and VN-Index. The empirical results have found there is negatively significant relationship between VN-Index on gold prices, while CPI, exchange rate and interest rate are positively significant. The results of the study are valuable for both academic and investor. Keywords: determinant, gold price, CPI, exchange rate, interest rate, VNIndex CHAPTER 1: INTRODUCTION 1.1. Problem statement Gold, one of the most precious metals mined has been widely used as a currency in the past. Today though its role for monetary purpose is limited, it is highly valued as a commodity for some industrial purposes and is widely bought as jewelry and seen as an asset for investment. Globally, the gold that is produced is consumed 50 percent as jewelry, 40 percent in the form of investments and 10 percent by industry (Robert, 2006). Gold has played an important role in the history throughout the world. The reason is because gold is scarce; therefore gold manages to retain its value. Due to this, gold has been commonly used as a safety in the case other form of money is constantly devaluing. Investing in gold is usually associated with the fears of high inflation period and political risk. Gold is in fact one of the most liquid asset during political risk, such as war, and etc. Gold is a natural resource that has a notable value for investments. Investors invest in gold for various reasons, which vary from hedging purposes to speculative investment. There is risk in every investment, considering gold price fluctuates constantly in the short run and considerably stable in the long run (Levin and Wright, 2006). As the price of gold fluctuates less in the long run, gold can be used as hedge instrument against inflation in the long run. Levin and Wright (2006) found that the price of gold in the long run follows the general price lever proportionately, that one percent increase in the US general price level leads to one percent increase in the price of gold. Gold is a long run hedge against inflation is also backed up by the findings by Gosh et al. (2004), which found that the price elasticity of gold, compared to US CPI is 1.1. Another studies proposed that gold is not an effective hedging tool against inflation in the short run, as the price of gold fluctuates too much. Gold return is independent of any other asset, because gold is believed to have negative beta (Levin and Wright, 2006). It means that the return of gold goes in the opposite direction with the market return. Therefore, gold is a good portfolio diversifier. Jaffe (1998) found out that adding 5-10% of gold investments to a portfolio provides a better return compared to portfolio without gold at all. As gold is an important form of investment nowadays, it is important to know the factors that determine the price of gold. There are three gold pricing models available conducted in the research: Macroeconomic approach, Speculations/Rationality of gold price movements approach, and Inflation Hedge approach. Macroeconomics approach explains that the movements in the price of gold are caused by macroeconomics variables. Speculation or rationality of gold price movements approach analyses whether any speculation or rationality assumed has an effect in the gold price movements. The inflation hedge approach concentrates on the movement of price of gold based on the inflation rate. This thesis will provide past empirical research regarding these three methods. The inflation hedge approach will be used in conducting this research. Vietnam is the world’s 47th largest gold producer (British Geological Survey, 2010), and the demand for gold in Vietnam keeps on increasing. With Vietnamese economy, which is affected by the appreciation and depreciation of other currency, the price of gold in Vietnam is very vulnerable. Therefore, in this research, the author would like to test the factors that determines the price of gold in general, affects the long run and short run price of gold in Vietnam. Therefore, in accordance with the outline above, this research is titled as: “Determinants of Gold Price in Vietnam” Name: Nguyen Ngoc Sy ID: 2448471 Class: MBAOUM0512-2C 6.4. Internal Analysis 6.4.1. Main Financial Figures and Market Share 6.4.1.1. Main Financial Figures Table 2: Main Financial Figures of Thai Tuan Textile Co. Ltd. Sources of Capital (million VND) Owned Capital 9,000 Long-term 31,449.083 Loans Short-term 21,322.051 Loans Capital Structure (million VND) Fixed Assets 31,112.851 Liquid Assets 29,935.518 Other Capitals 722.765 Figures Unit Billion VND Turnover Billion VND Tax Payments People Labor Average Wages VND/People/Month Source: Thai Tuan’s Documents. 2010 100 16 960 3,700,000 2011 180 26.8 1020 3,900,000 2012 200 34.5 1415 4,100,000 It is noticed that the owned capital has a small proportion (14.6%) in the total investment capital. This is the bankruptcy threat for company if it does business inefficiently. However, thanks to their effective activities and high growth rate, company has expended their company size as well as increased average wages though company has paid the significant increase tax. Capital Structure also shows the greatly concentrate investment of company for the machinery (50.4%) to achieve the production capability which satisfies the descriptive objectives related to product quality. 6.4.1.2. Market Share The Market Share of each kind of fabric product of Thai Tuan Textile Co. Ltd. is expressed in the table below Table 3: Market Share of each kind of Thai Tuan’s products Kind of fabric product Market Share (%) Embroidery Silk 27 Sateen 10 Silk Satin Source: Thai Tuan’s Documents. % of consumed output 52 38 Overall market share of Thai Tuan Textile Co. Ltd. = (27x52 + 10x38 + 8x7 + 4x3)/ 100 = 18.52% BUSINESS RESEARCH METHOD Page 15/30 Name: Nguyen Ngoc Sy ID: 2448471 Class: MBAOUM0512-2C 6.4.2. Products When the living standard is raised, the consume tendency of Vietnamese people begin to shift to use the high product quality. Thai Tuan Textile Co. Ltd. is known as the Textile Company which provides the fashion fabrics to make the Vietnamese dress as well as the fashion cloths for ladies. At present, company produces some textile products:  Kinds of embroidery silk make up 52% of consumed output in which: - Roughen embroidery silk makes up 39% of consumed output. - Sleeked embroidery silk makes up 7% of consumed output. - Grained embroidery silk makes up 3% of consumed output. - Elasticized embroidery silk makes up 3% of consumed output.  Kinds of sateen (shiny sateen, grained sateen, smoothen sateen) makes up 38% of consumed output.  Silk makes up 7% of consumed output.  Satin makes up 3% of consumed output. Silk 7% Satin 3% Sateen 38% Embroidery Silk 52% Figure 2: Structure of ThaiTuan Textile Products Source: Thai Tuan’s Documents. Today, Thai Tuan textile products have been consumed all over the country in which HCM City and the Mekong Delta considered the biggest markets. They also have been exported to U.S, France, Canada, Germany and many other countries through the intermediaries. BUSINESS RESEARCH METHOD Page 16/30 Name: Nguyen Ngoc Sy ID: 2448471 Class: MBAOUM0512-2C 6.4.3. Production Process The company process technology to produce fabrics is a closed process, which contains five main sub-processes (fig. 3). They are (1) spinning, (2) weaving, (3) dyeing and finishing, (4) classifying and (5) packaging. Each of them, however, includes several other steps to eventually produce their respective final products, that is, warp and filling yarns in the spinning process; gray cloth in weaving; dyed cloth in dyeing and finishing; up-to-standard fabric in the classifying and fabric roll in the packaging process. 6.4.4. Current Technology Current Technology in the Thai Tuan Textile Co. Ltd. is considered in terms of four technological components: technoware, humanware, inforware and orgaware. 6.4.4.1. Technoware Textile technology is generally considered based on the generations of machinery and equipment, which is an essential competitive advantage for a textile company. The quality of fabric as well as production cost depends so much on the generations of machinery used. There are two main spinning systems used in the world: ring spinning and open-end rotor spinning. Ring spinning is much less productive than rotor spinning system. Ringspinning system is used in Thai Tuan Textile Co. Ltd. Although being ring spinning system, all of spinning machinery are the brand-new ones with manufacturing year is 1995. They assure to provide the necessary quantity of yarns to the weaving looms. In the other hand, fibers used are synthetic ones, which are standardized. Along with new machinery, this makes the high quality warp yarns and filling yarns produced in the spinning process. In Vietnam, there are two main types of weaving technology. Traditionally, looms with shuttles are used. This technology has slow production rate and requires higher skills of technicians and weavers. Most of Vietnamese textile companies are using shuttle looms in their factories. The second type is the weaving technology with shuttleless looms. They allow broadening the width of fabric produced. They can produce high standard fabrics and the rate of substandard product is low. In addition, the high quality of company products are achieved and maintained through the computerized dyeing equipment, which few of textile companies have at this time. BUSINESS RESEARCH METHOD Page 17/30 Name: Nguyen Ngoc Sy ID: 2448471 Class: MBAOUM0512-2C 6.4.4.2. Humanware “Our people are our greatest resource” is one of the statements most commonly found in reports of many companies. Without the right people in the right positions, no strategy, however, well formulated in other respects, is likely to succeed. The objective of strategic human resource management is to develop manpower plan that matches people with a company’s strategic requirements, both in the short run and the long run. Realizing this importance, from the establishment to the present time, human resource management is always the concentration of setting company strategies in Thai Tuan Textile Co. Ltd. Related to the human resource, the number of company staff is 1415, which contain 181 managers (12.8 %), and 1234 workers (87.2 %). Before being accepted to the company, all of workers must pass the skill examination to make sure they can use effectively machinery and equipment in the production process. The recruitment is done by the Administrative Department based on the company development and expansion plans of production process. All of them come from the family, which has the tradition of working in textile industry or shift from the other textile companies. For the managers, all of them have the engineer/ bachelor degrees (for officers) or high skill and experience degrees (for foremen). For directors, beside the educational degree, they also have working experiences and good relationship with textile industry and government agencies thanks to the long-term working process in the other textile companies. All of company consultants have master degree and come from well-known institutes such as Asian Institute of Technology and Polytechnic Institute. 6.4.4.3. Inforware Company has promulgated documents of company working regulation in which stipulates the roles and responsibilities of each department and factory. Because most of machinery is the new ones, company has sufficient documents in terms of specifications, operation and maintenance manuals so that they can plan the maintenance plans to maximize the machine performance. The machine maintenance is done regularly by the technical groups. This helps company producing continuously without serious problems. Every three years, all of machinery are overhauled and replaced defective components. BUSINESS RESEARCH METHOD Page 18/30 Name: Nguyen Ngoc Sy ID: 2448471 Class: MBAOUM0512-2C However, these documents (specifications and maintenance manuals) have been yet disseminated widely to workers who just know how to operate machines and equipment and overcome some small common problems appearing in the production process. This limits the employee’s operative capability and huddles their supportive capability. Employees cannot take full advantage of machinery they use as well as create improvements when they not know clearly their specifications. This is being overcome thanks to the implementation of Total Quality Management (TQM) process to get the ISO 9000 Certificate in the company. To select alternative technologies and choosing the appropriate ones, company has a database, which is build from the different data sources. There are two kinds of them:  Primary sources include information coming from trade fairs of textile industry, which is often organized annually. Although company cannot take part regularly due to the capital limitation, they may get this information from the Vietnamese commercial representatives in the opening country. Another source comes from the database of National Science and Technology Information Center that stores almost patents and inventions of all of industries all over the world.  Secondary sources are formed through the textile magazines, technical information of newspapers, reports of consumer surveys etc. It must be concerned the important role of information coming from the relatives, friends as well as competitors. Most of the cases, this information is similar as orientation of searching information process. 6.4.4.4. Orgaware Company has the empower policy which allows directors decide all the problems related to their responsible area. Thai Tuan Textile Co. Ltd. has a good staffing policy. Recruiting managers based on the require experiences and skills is done through interviewing carefully from to times depend on the importance of recruit positions. Furthermore, the company set up a good relationship with universities and vocational institutes in HCM City. Therefore, it has opportunities to attract graduates to work for the company. Generally, company has put right person on right position to exploit the abilities of each person. BUSINESS RESEARCH METHOD Page 19/30 Name: Nguyen Ngoc Sy ID: 2448471 Class: MBAOUM0512-2C 6.5. Strategy Formulation Process 6.5.1. Forecasting Market and Technology Based on the analyses of customers and textile products as well as technology information which company has, company forecasts the tendencies of market and technology in the future. 6.5.1.1. Market Fabric product market will become more diversified with the anticipation of many kinds from foreign and domestic textile companies. Because of increasing income, urban customer tendency will shift from price concentration to value-orientation. Fabric products made of natural materials and getting high requirements of pattern, color and surface characteristics will be liked. In addition, the development of fashion clothes along with their high requirements of coordinating pattern and color will make the use of wider width size fabric products. 6.5.1.2. Technology Today's yarn and fabric production speeds are many times what they were only a few years ago. And quality levels have reached the point that some manufacturers find it is in some cases an unnecessary expense to even inspect finished fabrics. The development of synthetic fibers led to the production of new types of durable and easily cared-for fabrics. In Vietnam, some of textile mills are beginning to use shuttleless looms due to the notice of advantages related to high productivity and less noise making. Meanwhile, the popular use shuttleless looms in many modern textile companies leads to the increase of quantity of fabrics made of the shuttleless looms in the world. Computer-based systems for optimizing dyeing time-temperature and improved color matching are common results of these years of technology development since they were developed in the early 1970’s. By monitoring and regulating the temperature and dye-bath strength, for example, they are able to improve the color consistency of different pieces of cloth. More recent advances in color physics combined with microelectronics have led to the use of computer-based spectrophotometer, which can define shades numerical[...]... understandings about the determinants of gold price in Vietnam, the second objective is to suggest appropriate solutions to help investors reduce the risk and gain return when investing in Vietnamese gold market and help the government manage better the price of gold 1.3 Research Questions This research is aimed at trying out and testing the impact of determinants affecting gold price in Vietnamese market... risks 2.1 Impacts of inflation Dipak et al (2002) published a paper in researching gold as an inflation hedge He has explained that inflation hedge price is the dollar price that gold would have to be in order to maintain its purchasing power In his findings, the nominal price of gold was $384 per ounce in January 1982 and $283 in December 1999 He concluded that gold was not a short-run inflation hedge... WGC (2011) in Gold Demand Trends” analyzed on the demand of the gold in terms of jewelry, investment, technology, and supply of the gold in terms of mine production, recycled gold, central banks, and gold production 2.3.1 International market - Supply: Gold is a rare metal The major gold entering the market comes from three sources: mining, recycling and official sector sales In term of mining source,... currency prices of gold surging to record highs, and the strength of demand generating considerable premiums on the domestic price of gold bars, investors continued to clamor for gold bars It can be seen that the demand for gold reserves and investment has the big influence in the Vietnam gold market, as well as the gold price in Vietnam There are very few studies researching about factors influencing gold. .. time in 20 years net buyers of gold 24 In this year, net buying resulted in 470 tons of gold The invigorated interest in gold can be traced back to the financial crisis, as this precious metal can be used as a hedge + Investment demand for gold: The role of gold amongst times of financial or political turmoil is significant Investors tend to buy gold when there is financial or political instability, since... encourage trading as well as gold trading 20 2.3 Impacts of demand and supply factors According to Dijak et al (2002), theoretically models verify whether gold can serves as an inflation hedge Both of the theoretically models were focused in one of the determinants of gold price, which is demand and the supply of gold The first model was focused in determining the effects of demand and supply of gold in short-run,... impact of variables on gold price We will identify and examine the main factors affecting gold price in Vietnamese market Some studies on other markets in the past defined various determinants and movements of gold price In this research, we want to give a clear view on the most important divers having effect on Vietnamese gold price from January, 2009 to June, 2014 (2) Based on the thorough understandings... papers The first finding is that there is a long-term relationship between the price of gold and the US price level, followed by second finding, which is the US price level and the price of gold moved together in a statistically significant long-run relationship supporting the view of that one percent increase in the general US price level leads to a one percent increase in the price of gold Thirdly, they... movements in the price of gold are consistent with the gold price rising over the time with the general rate of inflation In addition, from the monthly gold price analysis data (1976-1999) and co-integration regression techniques provided by Dipak et al (2002) have confirmed that gold can be regarded as a long-run inflation hedge and the movements in the nominal price of gold are dominated by short-run influences... movements in the demand of gold and movements in the price of gold In the electronic industry, gold is used for wiring and as electrical connectors The advantages of this material are highly conductivity, resistant to corrosion and lack of toxicity Other uses are in the commercial chemistry In dentistry, gold alloys are used in tooth restorations In medicine, gold can be applied as a conductive coating As gold . hedge price is the dollar price that gold would have to be in order to maintain its purchasing power. In his findings, the nominal price of gold was $384 per ounce in January 1982 and $283 in. determines the price of gold in general, affects the long run and short run price of gold in Vietnam. Therefore, in accordance with the outline above, this research is titled as: Determinants of. Determinants of Gold Price in Vietnam 10 1.2. Research Objective The aim of this research is to study the determinants of the price of gold in Vietnam. The research is conducted using some macroeconomic