Impact of Gold on World Economy

3991 Words Nov 16th, 2010 16 Pages
[pic] Introduction

There is very little, if any, effect on the economy from the price of gold. If anything, the opposite is usually true: perceptions about the economy can directly affect the price of gold. The usefulness of gold as an economic indicator is questioned by some, but it is still widely recognized as a hedge against the U.S. dollar and as some measure of inflation. Gold is used in most electronic devices such as computers and cell phones, but in such small quantities that fluctuations in the price of gold have very little impact on this sector of the economy.
Gold and Inflation
Traditionally, the price of gold was seen to reflect monetary inflation, that is, inflation of the money supply. Because the fractional
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Gold Options vs. Gold Futures
Compared to the outright purchase of the underlying gold futures, gold options offer advantages such as additional leverage as well as the ability to limit potential losses. However, they are also wasting assets that have the potential to expire worthless.


Additional Leverage
Compared to taking a position on the underlying gold futures outright, the buyer of a gold option gains additional leverage since the premium payable is typically lower than the margin requirement needed to open a position in the underlying gold futures.

Limit Potential Losses
As gold options only grant the right but not the obligation to assume the underlying gold futures position, potential losses are limited to only the premium paid to purchase the option.
Using options alone, or in combination with futures, a wide range of strategies can be implemented to cater to specific risk profile, investment time horizon, cost consideration and outlook on underlying volatility.
Time Decay
Options have a limited lifespan and are subjected to the effects of time decay. The value of a gold option, specifically the time value, gets eroded away as time passes. However, since trading is a zero sum game, time decay can be turned into an ally if one choose to be a seller of options instead of buying them.

[pic] Determinants of the Price of Gold

Assuming that the short-run price of gold is
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