Correlations between gold spot prices and futures prices

Abstract

In this thesis, we study behavior of gold prices by using the stochastic model proposed by Issaranusorn (2010). We use gold spot price data obtained from the LGMF (London Gold Market Fixing Limited) to estimate the model parameters based on the maximum likelihood method. Utilizing the gold spot prices data with the estimated parameters, we compute the correlations between the no-arbitrage futures prices and futures prices obtained from TFEX (Thailand Futures Exchange). We find that all of the correlation coefficients are positive. The spot prices and the no-arbitrage futures prices are perfectly correlated. This implies that the gold spot prices and their futures prices are strongly correlated. In the economic point of view, these results suggest that the futures market in Thailand is efficient. Moreover, we study seasonal variation in gold prices by investigating the convenience yields of gold in Thailand. We find that the convenience yields of gold exhibited seasonality in which are highest in the end of January and the lowest in the end of July. These results have supported the idea that many Thai people, especially Thai-Chinese people, purchase gold as a gift on Chinese new year’s day during the end of January annually and no special event until the traditional Indian wedding that needs a large amount of gold as a dowry in the end of year.