Abstract

The purpose of this paper is to investigate the influence of inflation rate and interest rate of The United States towards the gold’s price. Besides that, the movement of Bitcoin and gold has also been examined in this paper. The past 30 years of historical data of the inflation rate, interest rate and the gold’s price has been applied in this study to examine the effect of inflation and interest rate towards the gold price. Other than that, the past 30 months of the Bitcoin’s price has also been applied in the research. Through the research, it has found that the inflation rate and the interest rate have a negative relationship with the gold’s price. In addition, this paper has also shown that the movement of Bitcoin’s price and gold’s price is in a same direction. In other words, the movement of these assets is positively correlated in which when the Bitcoin price’s increase, the price of gold is also increase.

Introduction

Gold has been one of the best instruments to hedge against inflation. Besides that, the gold is considered as one of the most liquid assets. This is because people are believing that the price of the gold is relatively stable as compared to other assets such as the stocks and cryptocurrency. Back in the days, the United States had adopted a concept in which the United State Dollar (USD) is pegged with the gold. This concept is also known as the Gold Standard. The concept behind is assume that the value of a currency is fixed relatively to gold. However, this concept was abandoned by the U.S. in 1971 due to the U.S would like to control inflation and avoid foreign countries overloading the system by exchanging their dollars for gold. Today, there are many investors still choose gold as the preferable assets to invest because there confident on the dollar is not as high as before when the States is still adopting the gold standard. According to Winters (2022), he had shared the words from Jim Cramer the host for CNBC’s Mad Money and Investing Club. As outlined by Jim Cramer, due to its uniqueness as a commodity and its long history as a reliable medium of exchange, gold has a stable value. Hence, the gold market would also considered as one of the high volatile markets. From the aspect of the foreign currency (FOREX) market, gold is denoted as XAU in the FOREX market, and it is paired with the USD become the pairing called XAU/USD. The XAU/USD is represented the spot gold price in troy ounce digitally because any positionin the market is not trading the physical gold. In the trading of XAU/USD, it usually influenced by the inflation and interest rate in the U.S. Other than that, the relationship between the Bitcoin and XAU/USD is also compared in this research. Bitcoin isone of the largest market caps as compared to the others cryptocurrency. It usually been called as the digital gold due to its scarcity and the difficulties to obtain it is high. The study of the XAU/USD has remained relatively unpopular studied topics as compared to the stock market. This is due to the exposure of the XAU/USD as well as the FOREX market in Malaysia is relatively unpopular among the people. Other than that, there are restrictions for the Malaysians to trade in the FOREX market unless with the authorised dealers such as banks and licensed money changer. However, gold was one of the assets in which people prefer to purchase due to stability of price. Hence, studying the effect of the inflation rate and interest rate towards the XAU/USD is important so that it may reflects the effect caused to the overall gold market. Due to the pandemic of COVID-19, the Fed of the United States had announced the unlimited quantitative easing (QE) in order to stimulate the economics of the U.S. The QE is a monetary policy that lowering down the interest rate on the savings and loans to increase the economics activities in the nation. Hence, it has driven the price of the gold as well as the XAU/USD hikes. This is because the willingness of the people to take money to invest is relatively high as compared to save it in normal saving accounts. Recently, due to the unlimited QE and the conflict between the Russia and Ukraine, it has cause severe inflation in the U.S. Hence, the Fed has started to conduct a move called tapering to control the nation’s inflation. Tapering can be known as the action of contractionary monetary policy in which started to withdraw the monetary stimulus plan that been used to stimulate the economics. Therefore, the Fed has started to hike the interest in the country and causing most of the assets’ price such as stocks and gold as well as the rate of XAU/USD to fall. Up to November, the Fed has hiked the interest rate sixth times consecutively and it has hiked up to 75 basis point for the latest announcement. On the other hand, the so-called digital gold, Bitcoin has also gone to the same direction as the XAU/USD in this event. However, as compared to the XAU/USD, there are other factors that may also affect the price of Bitcoin such as the regulatory problems that has been unsolved until now. Other than that, the collapse of the exchange has also created panic sell on the digital assets. Hence, this study may also study the relationship of Bitcoin with the XAU/USD. In this research, the affection of the changes of the inflation rate and interest rate as well as the movement of Bitcoin towards the XAU/USD will be studied. However, the studied on the relationship between the chosen variables and the XAU/USD are limited. This is due to the data obtained might not provide an accurate result.