Introduction
Macroeconomic Environment
Saudi Arabia is a country, which relies on oil. The macroeconomic indicators demonstrate a full reliance on oil that is a major export in the kingdom. According to Azzam, the exports and revenues from oil contribute more than 90% of the region’s GDP (69). Indicators such as unemployment, inflation, stock, and GDP of the country vary in relation to the changes in oil prices. Although the country is rich in oil and exports it in high volumes, the consistency of prices and input or GDP is not practical.
The absence of practicability in consistency occasions because there are instances where prices of oil change. Change in oil prices leads to pronounced effects on the rates of interest, per capita, and stock. A good example transpired in 2002 when the price of consumer goods rose to about $114 (Ramady 102). Therefore, the macroeconomy of Saudi Arabia relies on oil, which dictates its GDP, otherwise known as per capita, stock, and interest rates.
Fundamentally, the rate of inflation in Saudi Arabia has been increasing and fluctuating since the early 1990s and is yet to stabilize. The situation worsened further with the recent introduction of oil and energy subsidies. By subsidizing the prices of oil and energy, the state had to incur additional costs, and hence, devise other sources of income. Apparently, the price of products, electricity, and healthcare increased because of the subsidies.
Since the region relies on oil that accounts for about 90% of its total revenue, it’s per capita reflects the variance demonstrated by oil prices. It is imminent to aver that the total input or per capita of Saudi Arabia accrues from oil exports. Mallach and Mallakh ascertain that indeed the fluctuations in per capita and interest rates emanating from the changes in oil prices (35). On the other hand, the stock sector of the region has evolved and currently enjoys more freedom unlike in the past when the laws regulating the stock and marketing environment were stringent.
Gold Market
Saudi Arabia, also known as the Kingdom of Saudi Arabia, is one of the states that have the highest levels of oil reserves in the world. The presence of oil has led to high scales of development and economic progress in the kingdom. In the study of the macroeconomic conditions of the kingdom, it is clear that the progress of the region hinges on the exports of oil, which accounts for more than half of its revenue.
However, the recent changes in the prices of oil have initiated a series of inconsistencies in the economy of Saudi Arabia. The serious effects of low oil prices became evident when the state sought alternative cash from bond markets. On the other hand, gold plays an instrumental role in the economy of Saudi Arabia. In essence, gold drives investment, stock exchange, and interest rates in the region. The fact that gold prices have an inverse relationship with the United States dollar substantiates the role of gold in the economy of Saudi Arabia.
Gold is one of the precious and most sought-after metals in the world. In essence, the demand for gold has been changing since the early 1990s. The fluctuations materialize because of the roles that the precious metal pays in various sectors of our society. While business people use gold to manufacture and sell jewels and other consumer goods, central banks of various countries purchase gold and keep them in their reserves to curb and manage their capital.
It is fundamental to highlight that several countries have gold reserves in their central banks, a factor that helps in the management of capital. Azzam states that the amount of gold reserves in Saudi Arabia was $1287 million in 2000 (35). The implication of the statement by Azzam clarifies the fact that the kingdom stands at a better place in relation to capital management. By holding a reasonable amount of gold reserves in its central bank, the region has an excellent reputation and can attain its objectives that espouse stable investment, low inflation, and interest rates.
Evidently, gold prices change simultaneously with the changes in the value of the United States dollar. When the economy is robust, and the dollar is doing well, investors are less likely to purchase and use gold, an element that lowers their prices. However, when the dollar is weak, investors purchase more gold, and thus, the price rises. Moreover, when several banks purchase gold, the price rises because the demand is high. It is important to explain that factors like inflation determine the price of gold, and therefore, by owning them, one can enjoy a stable level of capital or asset base. In the words of Ramady, when banks have a good amount of gold reserves, they are less likely to experience serious challenges in the advent of inflation (58). Fundamentally, the minimal effect that inflation has on gold prices takes place because individuals, who purchase the metal, are wealthy and do not experience serious problems when product prices rise.
Purpose, Methodology, and Thesis
The Purpose of the Study
- Establish the influence of the stock price, the inflation rate, and The GDP per capita on the gold price in Saudi Arabia.
- Describe the economic significance of the stock price, the inflation rate, and The GDP per capita in Saudi Arabia.
Methodology
In establishing the influence of the stock price, the inflation rate, and The GDP per capita on the gold price in Saudi Arabia, the study used multiple regression analysis. Before performing multiple regression analysis, the study performed correlation analysis to establish the strength and nature of the relationship between the gold price(the dependent variable) and the stock price, the inflation rate, and The GDP per capita (the independent variables).
Subsequently, the study performed a regression analysis of each independent variable to establish the extent to which each of them influences the gold price in Saudi Arabia. Ultimately, the study performed multiple regression analyses to design a model that can effectively predict the influence of the stock price, the inflation rate, and The GDP per capita. The following research questions guided the analysis of data.
- What is the influence of the stock price on the gold price in Saudi Arabia?
- What is the influence of the inflation rate on the gold price in Saudi Arabia?
- What is the influence of The GDP per capita on the gold price in Saudi Arabia?
- What is the collective influence of the stock price, the inflation rate, and The GDP per capita on the gold price in Saudi Arabia?
Thesis
As the study aimed to establish the influence of the stock price, the inflation rate, and The GDP per capita, it hypothesized that:-
- The stock price has no statistically significant influence on the gold price in Saudi Arabia.
- The inflation rate has no statistically significant influence on the gold price in Saudi Arabia
- The GDP per capita has no statistically significant influence on the gold price in Saudi Arabia
- The stock price, the inflation rate, and The GDP per capita have no statistically significant influence on the gold price in Saudi Arabia.
Research and Findings
Research Data
The study used economic data obtained from Saudi Arabi, which indicates diverse economic indicators for the last 15 years (2000-2014). The data comprise variables such as gold price, real GDP growth, unemployment rate, the inflation rate, nominal oil prices, the stock price (TASI), gold production, GDP per capita, and population. As the aim of the study is to establish the influence of the stock price, the inflation rate, and The GDP per capita on the gold prices, the study selected these variables from the data obtained from Saudi Arabia.
In modeling the relationship between these variables, the study selected the gold price as a dependent variable and made the inflation rate, the stock price, and The GDP per capita dependent variables. In essence, the study aims to model the stock price, the inflation rate, and The GDP per capita as predictor variables and the gold price as a criterion variable. Regression analysis of these variables provides the influence of each predictor on the gold price in Saudi Arabia. The following is the data that the study will use in modeling the relationship between the gold price as a dependent variable and the stock prices, the inflation rate, and The GDP per capita as the independent variables.
Table 1: Data for the Study.
Description of Each Factor
The stock prices (TASI) and Gold Price
The stock price is an economic factor that influences diverse economic factors in a given economy. Since the gold price is an asset, its price varies according to the trend of the stock prices. Investors prefer to invest in gold because it more in the market than the stock price. Azar elucidates that the stock price in the United States does not have a statistically significant relationship with the gold price (163).
The relationship is not evident because there are confounding variables that mediate and interact in influencing gold prices. In Saudi Arabia, the Tadawul All Share Index (TASI) is a Saudi Arabia stock market, which determines the prices of stock assets. In this view, the analysis of the relationship between the stock price and the gold price gives valid and reliable information, which reflects the Saudi Arabian economic environment.
The table below (Table 2) depicts the relationship between the stock price (TASI) and the gold price. Correlation analysis indicates that there is a very weak positive correlation between the stock price the gold price(r = 0.162, p = 0.564).
Table 2: Correlation between TASI and Gold Prices.
The inflation rate and Gold Price
The inflation rate is an economic factor that has marked influence on diverse economic factors because it affects the availability and distribution of money. High inflation rates usually increase interest rates and augments prices of products resulting in a reduced value of a currency. Tufail and Batool describe gold as an inflation-hedging asset because it has a strong relationship with the inflation rates (2). Fundamentally, the inflation rate has a positive relationship with gold prices in diverse countries for it reflects the state of an economy. When inflation increases, the gold price increases in response to the market forces that are subject to the forces of demand and supply.
Analysis of the data in this study using correlation reveals that the inflation rate and the gold price have a strong relationship. The correlation table (Table 2) shows that the gold price and the inflation rate has a moderate positive correlation, which is statistically significant (r = 0.536, p = 0.040).
Table 3: Correlation between the Gold Price and the Inflation Rate.
The GDP per capita and Gold Price
The GDP per capita is an economic factor that influences diverse economic factors in varied macroeconomic environment. The GDP per capita reflects the ability of a country to produce valuable products that trade in both local and international markets. Countries that have high production rates have high GDP per capita while countries that have low production rates have low GDP per capita. According to Sukri, Zain, and Abidin, the gold price is subject to diverse microeconomic factors such as GDP per capita, oil prices, interest rate, and the inflation rate (89).
These factors influence the gold price directly or indirectly through their interactive and collective influence. In Malaysia, the gold price and The GDP per capita have a strong positive relationship (Sukri, Zain, and Abidin 88). Therefore, the analysis of data should exhibit a positive relationship between the gold price and The GDP per capita.
Correlation analysis shows that the gold price and The GDP per capita have a very strong relationship. The correlation test reveals that the gold price and The GDP per capita have a very strong positive correlation, which is statistically significant (r = 0.959, p = 0.000).
Table 4: Correlation between the Gold Price and the GDP Per Capita.
Outcome of Regression
Prediction of the Gold Price Using the Stock Price
Table 5: Model Summary.
Table 6: ANOVA.
Table 7: Coefficients of The stock price (TASI).
Prediction of the Gold Price Using The inflation rate
Table 8: Model Summary.
Table 9: ANOVA.
Table 10. Coefficients of The inflation rate.
Prediction of the Gold Price Using the GDP Per Capita
Table 11: Model Summary.
Table 12. ANOVA.
Table 13: Coefficients of the GDP Per Capita.
Prediction of the Gold Price Using the Stock Price, The inflation rate, and the GDP Per Capita
Table 14: Model Summary.
Table 15. ANOVA.
Table 16: Coefficientsof the Stock Price, the Inflation Rate, and the GDP Per Capita.
Statistical Significance and the Interpretation
The Influence of The stock price on Gold Price
The model summary (Table 5) shows that there is a weak relationship between the stock price and the gold price in Saudi Arabia (R = 0.162). The R-square coefficient indicates that the stock price explains 2.6% of the variation in the gold price(R2 = 0.026). Analysis of the regression model (Table 6) shows that it is statistically insignificant in predicting the relationship between the stock price and the gold price in Saudi Arabia F(1,13) = 0.351, p = 0.564. The coefficients of regression (Table 7) show that a unit increase in the stock prices causes an increase in the gold price by 0.022, which is statistically insignificant (p = 0.564), as indicated by the regression equation.
- Regression equation: The gold price= 674.923 + 0.022(the stock price)
The Influence of The inflation rate on Gold Price
The regression model shows that the inflation rate and the gold price have a moderate relationship (R = 0.536). The R-square reveals that the inflation rate explains 28.7% of the variation in the gold price in Saudi Arabia (R2 = 0.287). The ANOVA table (Table 9) indicates that the regression model is statistically significant in predicting the influence of the inflation rate on gold price, F(1,13) = 5.236, p = 0.04. Analysis of the coefficients shows that a change in the inflation rate has a marked influence on the gold price. Fundamentally, the regression coefficients predict that a unit increase in the inflation rate results in an increase in the gold price by 94.405, which is statistically significant (p = 0.04). The regression equation demonstrates the prediction of the gold price by the inflation rate.
- Regression equation: The gold price= 578.157 + 94.405(the inflation rate)
The Influence of The GDP per capita on Gold Price
Regression analysis depicts that the relationship between The GDP per capita and the gold price is very strong (R = 0.959). The R-square coefficient reveals that The GDP per capita explains 92% of the variation in the gold price in Saudi Arabia (R2 = 0.92). The regression model used in predicting the influence of The GDP per capita is statistically significant, F(1,13) = 148.865, p = 0.000, as indicated in Table 11. The regression coefficients show that a unit increase in The GDP per capita results in an increase of the gold price by 0.001, which is statistically significant (p = 0.001). The regression equation below illustrates the prediction of the gold price using The GDP per capita.
- Regression equation: The gold price= -153.243 + 0.001(The GDP per capita)
Multiple Regression Analysis
The multiple regression analysis shows that the stock price, the inflation rate, and The GDP per capita are strong predictors of the gold price in Saudi Arabia (R = 0.965) The R-square value depicts that the stock price, the inflation rate, and The GDP per capita collectively explain 93.2% of the variation in the gold price in Saudi Arabia. The regression model used is statistically significant in predicting the influence of the stock price, the inflation rate, and The GDP per capita on the gold price in Saudi Arabia, F(1, 13) = 50.027, p = 0.000. The coefficients table (Table 15) shows The GDP per capita is the only predictor that is statistically significant predicting the gold price(p = 0.000).
However, the stock level (p = 0.193) and the inflation rate (p = 0.866) are statistically insignificant predictors of the gold price in Saudi Arabia. The regression equation holds that a unit increase in the stock price, The GDP per capita, and the inflation rate causes a decrease in the gold price by 0.015, an increase in the gold price by 0.001, and a decrease in the gold price by 2.919 respectively. The following regression equation illustrates the regression model that predicts the gold price in Saudi Arabia.
- The gold price= -82.667 – 0.015(the stock price) + 0.001(The GDP per capita) – 2.919(the inflation rate)
Economic Significance of Each Parameter
Economic Significance of The stock price
The findings indicate that the stock price has a very weak positive correlation with the gold price, which is statistically insignificant (r = 0.162, p = 0.564). The correlation outcome implies that the relationship between the stock price and the gold price has no considerable economic significance in Saudi Arabia. Moreover, regression analysis indicates that the stock price explains 2.6% of the variation in the gold price in Saudi Arabia, which is statistically insignificant (p = 0.564).
The economic significance of this explanation is that the stock price has a small influence on gold prices. Regression coefficients predict that a unit increase in the stock prices causes an increase in the gold price by 0.022. Such an increase is very small and is statistically insignificant. Therefore, based on the very weak association and the small influence of the stock price on the gold price in Saudi Arabia, investors should not rely on the stock prices in predicting gold prices.
Economic Significance of The inflation rate
Analysis of the relationship between the variation in the inflation rate and the gold price reveals that they a moderate positive correlation, which is statistically significant (r = 0.536, p = 0.040). The moderate positive correlation implies that an increase in inflation causes a considerable increase in gold price. Regression analysis reveals that the inflation rate explains 28.7% of the variation in the gold price in Saudi Arabia.
This finding shows that the inflation rate alone explains about a third of the variation in the gold price in Saudi Arabia, which is quite significant. The regression coefficients indicate that a unit increase in the inflation rate causes an increase in the gold price by 94.405, which is statistically significant (p = 0.04). This finding shows that the inflation rate has a considerable influence on the gold price in Saudi Arabia. Based on these findings, investors in Saudi Arabia should invest in gold so that they can gain huge profit margins during inflation.
Economic Significance of The GDP per capita
Analysis of the data indicates that The GDP per capita and the gold price has a strong positive relationship (r = 0.959, p = 0.000). The strong positive relationship has economic significance because it shows that an increase in The GDP per capita influence almost a similar increase in the gold price. In quantification of the influence, regression analysis indicates that The GDP per capita explains 92% of the variation.
The influence of The GDP per capita is immense because it explains almost 100% of the variation in the gold price in Saudi Arabia. The regression equation shows that a unit increase in The GDP per capita increases the gold price by 0.001, which is statistically significant (p = 0.001). In this view, the variation in The GDP per capita is a significant predictor of the gold price in Saudi Arabia. Hence, investors should rely on GDP in predicting the trend of the gold price and buy gold when The GDP per capita is low so that they can sell it when The GDP per capita increases. Overall, GDP has economic significance because it explains most of the variation in the gold price in Saudi Arabia.
Statistical Conclusion
Regression analysis reveals that the stock price is a statistically insignificant predictor of the gold price while the inflation rate and The GDP per capita are statistically significant predictors of the gold price in Saudi Arabia. The stock price is a statistically insignificant predictor of the gold price because it explains 2.6% of the variation in the gold price in Saudi Arabia (R2 = 0.026, p = 0.564). In essence, the influence of the stock price on the gold price is not statistically significant, and thus, it has considerable economic significance to investors. However, the inflation rate is a statistically significant predictor of the gold price for it explains 28.7% of the variation in the gold price in Saudi Arabia (R2 = 0.287, p = 0.04).
The influence of the inflation rate on the gold price has considerable economic significance as investors can predict the relationship between these variables. The GDP per capita is a statistically significant predictor because it explains 92% of the variation in the gold price in Saudi Arabia (R2 = 0.92, p = 0.000). In this view, The GDP per capita has economic significance because it predicts most of the variation in the gold price in Saudi Arabia.
Multiple regression analysis shows that the stock price, the inflation rate, and The GDP per capita collectively explain the variation in the gold price in Saudi Arabia. The analysis reveals that the stock price, the inflation rate, and The GDP per capita collectively explain 93.2% of the variation in the gold price in Saudi Arabia (R2 = 0.932, p = 0.000). The examination of coefficients of each predictor shows that The GDP per capita is the only predictor that is statistically significant while the stock price and the inflation rate are statistically insignificant. Fundamentally, The GDP per capita contributes significantly to the regression model (p = 0.000) while the inflation rate and the stock price contribute insignificantly to the model (p>0.05).
Conclusion
Implication of the Formula
The analysis of data using multiple regression analysis gave rise to the regression formula, which demonstrates the relationship between the gold price and the stock price, the inflation rate, and The GDP per capita. In essence, the regression formula demonstrates the influence of the stock price, the inflation rate, and The GDP per capita on the gold price in Saudi Arabia. The following is the regression formula derived from the multiple regression analysis.
- The gold price= -82.667 + -0.015(the stock price) + 0.001(The GDP per capita) + -2.919(the inflation rate)
The regression coefficients show that the stock price, the inflation rate, and The GDP per capita influence gold prices. Regression coefficients reveal that the stock price and the inflation rate are not statistically significant predictors of the gold price in Saudi Arabia (p>0.05). However, the regression coefficients indicate that The GDP per capita is a statistically significant predictor of the gold price in Saudi Arabia (p = 0.000). Overall, the formula implies that a unit increase in the stock price, the inflation rate, and The GDP per capita causes a decrease in the gold price by 0.015, an increase by 0.001, and a decrease by 2.919 respectively.
Forecast
The regression model used in predicting the influence of the stock prices, the inflation rate, and The GDP per capita on the gold price in Saudi Arabia is a statistically significant model (p = 0.000). The significance of the model implies that it can predict the variation of the gold price using the stock price, the inflation rate, and The GDP per capita. From the model, what is evident is that the stock price, the inflation rate, and The GDP per capita have a positive relationship with the gold price in Saudi Arabia according to the data provided. The positive relationship implies that an increase in any of these predictors, namely, the stock price, the inflation rate, and The GDP per capita, causes an increase in gold price.
Regression analysis of the relationship between the stock price and the gold price reveals that they have a very weak positive relationship (R = 0.162). Regression analysis further indicates that the stock price explains 2.6% of the variation in the gold price in Saudi Arabia. Based on these findings, it is evident that an increase in the stock price causes an increase in gold prices. However, the effect of the stock price on the gold price is statistically insignificant.
The insignificance effect means that an increase in the stock price does not always cause an increase in gold price. Regression analysis of the stock price and the gold price shows that a unit increase in the stock price causes an increase in the gold price by 0.002. However, the regression model, which is statistically significant in predicting the influence of the stock price, the inflation rate, and The GDP per capita, indicates that a unit increase in the stock price causes a decline in the gold price by 0.015.
The analysis of the relationship between the inflation rate and the gold price shows that they a moderate positive relationship (R = 0.536). Individually, inflation explains 28.7% of the variation in the gold price in Saudi Arabia. These findings, therefore, shows that an increase in the inflation rate causes an increase in gold price. Nevertheless, the regression model reveals that an increase in the inflation rate causes a decrease in gold price. Fundamentally, the regression equation shows that a unit increase in the inflation rate causes a decline in the gold price by 2.919. However, the influence of the inflation rate is statistically insignificant according to the regression model. In this view, the inflation rate is unreliable in predicting the gold price in Saudi Arabia.
The analysis of the relationship between The GDP per capita and the gold price indicates that they have a very strong relationship. The correlation coefficient shows that The GDP per capita has a very strong positive relationship with the gold price in Saudi Arabia (R = 0.959). The positive relationship, which is statistically significant, shows that an increase in The GDP per capita causes a proportional increase in the gold price.
The regression model indicates that The GDP per capita explains 92% of the variation in the gold price in Saudi Arabia (R = 0.92). This finding shows that The GDP per capita is a significant predictor because it has a marked influence on gold prices. The regression equation reveals that a unit increase in The GDP per capita causes an increase in the gold price by 0.001, which is statistically significant. From the regression model, it is apparent that The GDP per capita is the most influential factor because it explains most of the variations in the gold price. Therefore, investors can use the regression model in predicting the influence of The GDP per capita on the gold price in Saudi Arabia and make accurate predictions, which are relevant to their investment decisions.
Works Cited
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