Theoretical aspects of investment demand for gold

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1 Victor Sazonov (Russia), Dmitry Nikolav (Russia) Thortical aspcts of invstmnt dmand for gold Abstract Th main objctiv of this articl is construction of a thortical modl of invstmnt in gold. Our modl is basd on two main variabls: th invstors raction to pric changs and thir pric xpctations formd on th basis of pric prformanc. On of th main faturs of our analysis is that w try to show th procss of forming pric xpctations and daling corrspondingly with formd xpctations on th dmand curv. So, on of th main rsults of our invstigation is a cration of diffrnt schmatic invstmnt dmand for gold curvs. Ths curvs charactriz invstor s bhavior at diffrnt pric priods which ar dividd into thr catgoris: pric priods whr gold is undrstimatd, ovrstimatd and corrctly stimatd. It is ncssary to undrlin that invstor s prformanc is analyzd in trms of th currnt pric and th xpctd pric ratio. Our articl is intndd to mphasiz that th laws that usually prvail on th goods markt los thir influnc on th prcious mtals invstmnt markt. Howvr, xpctations of individuals play a ky rol and prvail. In our opinion it is important to put xpctations as a ky variabl which mainly dtrmins dcision-making procss of conomic individuals, spcially invstors. Corrsponding with this, w offr a nw viw of th invstmnt dmand for gold function whr not only th currnt, but also th xpctd pric of gold acts as a variabl. It is important to mphasiz th practical valu of our invstigation. This modl of invstmnt dmand for gold can b a usful bas for analyzing invstor s bhavior on th gold markt. Kywords: invstmnt dmand for gold function, pric xpctations, xpctd pric, invstmnt in gold, prcious mtals invstmnt markt, information rvald through prics. JEL Classification: D84, G11, G17. Introduction Th apparanc of gold-backd ETFs (Exchang Tradd Funds) has mad gold invstmnt much mor accssibl to a widr audinc. Economic growth in China, India and many othr mrging conomis of South East Asia has bn particularly rlvant to th gold invstmnt incras. As GDP and incoms in ths countris raisd so did invstmnt dmand for gold. Thus, th invstmnt dmand for gold bcam mor rlvant in th sns of influncing gold s pric, spcially in a short run. This rlvanc can b xhaustivly illustratd on th basis of many xampls. Th last clar xampl of dfining th pric of gold by th invstmnt dmand is th dramatic pullbacks in th gold pric in th first half of 2013 which wr totally promptd by th dcras in ETFs gold holdings. On of th antircssionary masurs of Cyprus govrnmnt in April 2013 was a slling of its gold holdings. This dcision promptd th procss of th radical changing and rvision of xpctations of invstors and all gold markt participants. Th latst gold markt vnts hav causd many qustions among conomists. And on of ths qustions was whthr this asst would continu to play th rol of th prfct divrsifir of an invstor portfolio. But th most important issu is about th principls of invstors conomic bhavior on th gold markt. Victor Sazonov, Dmitry Nikolav, W suppos that th bst way of invstigation and prdicting of invstor s prformanc is th analyzing of xpctations forming procss. Prics ar th basic markt signals that includ all th information that is availabl in a particular momnt. In many cass pric can b th main sourc of information for conomic individual and thus th background of forming xpctations. In this rason, it is important to xplor th ssnc of forming xpctations of invstor on th basis of pric prformanc. In this articl, w try to show th procss of forming invstors pric xpctations on th basis of information rvald through prics and daling corrspondingly with formd xpctations on th dmand curv. In our analysis, w us th xpctd pric as a ky variabl which mostly dtrmins th way of invstors bhavior. Th xpctd pric in our analysis is an ndognous variabl if it is formd on th basis of information rvald through prics. Othrwis, if thr ar any othr factors which influnc th procss of forming th xpctd pric of invstors (information which isn t rvald through prics) thn it is an xognous variabl. On of th main rsults of our invstigation is construction of diffrnt schmatic invstmnt dmand for gold curvs. Ths curvs charactriz invstor s bhavior at diffrnt pric priods which ar dividd into thr catgoris: pric priods

2 whr gold is undrstimatd, ovrstimatd and corrctly stimatd. It is ncssary to undrlin that invstor s prformanc is analyzd in trms of th currnt and th xpctd pric ratio. In this articl w intnd to show that th laws that usually prvail on th goods markt los thir influnc on th prcious mtals invstmnt markt. Howvr, xpctations of individuals play a ky rol and prvail. Corrsponding with this, w offr a nw viw of th invstmnt dmand for gold function whr not only th currnt, but also th xpctd pric of gold acts as a variabl. W hop that this modl of invstmnt dmand for gold will b hlpful for analyzing invstor s bhavior on th gold markt. 1. Litratur rviw An individuals bhavior is basd on xpctations of what futur is going to bring. Expctations ar th intgral part of conomic rlations. Othrwis, th absnc of xpctations of conomic individuals, as a rational incntiv of thir bhavior, would lad to impossibility of forming conomic rlations. Adam Smith, th foundr of classical conomics, was on of th first conomists who mntiond xpctations for xplanation of faturs of popl bhavior (Smith, 1759). John Maynard Kyns said that xpctations ar th lmnt of mchanism which prompts ntrprnurs to work (Kyns, 1936). It is notabl that xpctations play a ky rol in managmnt sinc individuals ar motivatd if thy bliv that thir fforts will b fruitful to rach goals (Vroom, 1964). On of th first modls of xtrapolativ xpctations was mad by conomist Mtzlr (1941). Th ky point of his modl is that xpctation of futur sals may dpnd not only upon th past lvl of sals, but also upon th dirction of chang of such sals. In our days th most popular thoris ar th thory of adaptiv xpctations and th thory of rational xpctations. Th adaptiv xpctations thory supposs that xpctations of individuals ar formd on th basis of past and currnt availabl information. Nrlov (1958) offrd on of th first modls of adaptiv xpctations. Adaptiv xpctations ar rprsntd as an xponntially wightd sum of past prics. If it turns out that xpctations do not coincid with th actual stat of variabls, thn an intllignt dcision-makr would rfrain from using th mthod by which xpctation wr formd (Mills, 1961). It is important to say that an xpctational rror is a vry important constitunt of adaptiv xpctations (Cagan, 1956). Thr ar many othr diffrnt modls of adaptiv xpctations that tak into considration diffrnt factors. Knnth J. Arrow and Lonid Hurwicz (1962) whil analyzing th rlations btwn currnt and xpctd prics and dmand allgd that currnt prics ar changd by currnt xcss dmand for commoditis, and that th xcss dmand dpnds on both currnt prics and xpctd futur prics, th lattr bing formd adaptivly to th past history of prics. Expctations can b usd to invstigat many conomic phnomna. In macroconomics xpctations ar usually usd in invstigation of montary policis (Fig, 1967, Lucas and Rapping, 1969). Th stor of goods can also b th factor of xpctations (Ngishi, 1964). Rational xpctations thory is a hypothsis in conomics which stats that agnts xpctations of futur variabls ar not systmatically wrong and all rrors ar random. Morovr it is supposd that individuals ffctivly us all availabl information. Rational xpctations thory uss pric xpctation as on of th most important variabls. Whn invstigating th ffcts of invntory spculation, Muth (1961) assums that an individual acts according to th xpctation of gain. In this sns, it mans that th individual xpcts a highr pric in th futur priod of tim. Morovr, prdictions of futur vnts ar formd on th basis of th rlvant conomic thory and all availabl information. Olivr J. Blanchard (1979) says in his papr Backward and Forward Solutions for Economis with Rational Expctations that thr is always on mor pric (xpctd pric), in spit of th markt on, to clar up. In his opinion, indtrminacy is a gnral fatur of modls in which currnt prics dpnd on xpctd futur prics or th xpctd rat of chang in prics. In th modl of land spculation studid in Futia s papr (1981) thr is a spculativ dmand quation which includs th spculator s forcastd futur pric in spit of th currnt pric. In his modl Futia dfins th xpctd pric as a random variabl which is a linar function of th spculator s information. And th information is th on that is availabl to th spculator at th momnt of making a dcision. It includs both th information xognous to th markt as wll as th information ndognously gnratd by th markt procss,.g. past prics. Morovr, it is allgd that th information is xognous in th sns that it is unaffctd by th markt procss and th markt activitis. Th ky point which Hicks mphasizd is that th xpctations hld by firms about futur ndognous 149

3 variabls (such as tomorrow s pric of corn) actually hlp dtrmin th tru valu of th futur ndognous variabls (Grossman, 1981). Whn analyzing th procss of forming th farmr s xpctd pric which is offrd by Muth, Grossman mphasizs that if th farmr knows th stochastic structur gnrating prics thn th pric h xpcts or anticipats for th nxt priod of tim is a conditional xpctation of this pric givn all past ralizations of th stochastic procss. In othr words, individuals with rational xpctations form anticipation of th futur xpctd pric by using th knowldg of procss gnrating prics whil individuals with adaptiv xpctations us only information about th past pric prformanc or look at past prics. Whn dscribing th Muth s prfct forsight modl of a stochastic conomy, Grossman prsnts th xpctd pric as a function of two othr random variabls: a random variabl summarizing th stochastic factors affcting dmand in th nxt priod of tim and a variabl indicating th random shocks affcting supply in th nxt priod of tim. Howvr in Sction 3 of his papr Grossman, considring quilibrium undr asymmtric information, confirms that th xpctd pric (or th markt-claring pric) dpnds on all individual s information at th tim of making dcisions and th two aforsaid variabls. Grossman says that tradrs hav diffrnt pric xpctations and this crats an incntiv for opning of a futurs markt whr thy can bt against ach othr. In othr words diffrnt xpctations of futur prics ar th main rasons of xistnc of spculativ markts. Morovr Grossman discusss th informativnss of prics and thrfor shows th rol of prics as a man of information xchang btwn tradrs in a stochastic conomy whr tradrs don t know all th information (Grossman, 1981). In turn Radnr (1979), in th articl Rational Expctations Equilibrium: Gnric Existnc and th Information, says that whn tradrs com to a markt with diffrnt information about th itms to b tradd, th rsulting markt prics may rval to som tradrs th information originally availabl only to th othrs. Furthrmor, th main assumption of Radnr s thory is that quilibrium prics in his modl rval to all markt agnts all th information initially availabl to all th agnts. In Sction 4 of his articl On th possibility of spculation undr rational xpctations Tirol (1982) assums that in th markt with homognous information tradrs bas thir bhavior on th comparison btwn th currnt pric and th probability distribution of th nxt priod pric. Vrriccha (1982) confirms that th information rvald by pric dpnds upon what information ach tradr acquirs, and th information ach tradr acquirs dpnds upon what h can larn costlssly through pric. On of th main important faturs of his papr is that in quilibrium tradrs conjcturs about how much information is rvald through prics ar fulfilld by thir own acquisition activitis. Morovr h says, Th lvl of informativnss of prics gnrally incrass with dcrass in th lvl of nois, th cost of acquiring information, and th risk avrsion of tradrs takn as a group. Th most important advantag of th Vrrcchia s modl is that it shows that th prics play th rol of an aggrgator, and not mrly a transmittr, of information. Thus thr ar many diffrnt thoris and opinions about th natur of xpctations, its rol in forming conomic bhavior and about th ways thy ar formd. But all ths thoris undrlin that xpctations ar vry important for analyzing a dcisionmaking procss of conomic individuals. 2. Invstmnt dmand for gold function Invstmnt dmand for gold has major varity of typical faturs. Flxibl raction to pric signals and high significanc of pric xpctations in sns of forming invstors bhavior hav mor importanc on th gold markt thn on th stock markt. That is bcaus th lvl of yilds on th markt of gold invstmnt is compltly dfind by th pric prformanc of concrnd asst. Th xpctd rvnu of th concrnd asst dirctly dpnds on its xpctd pric at th nd of a priod: P R 1, (1) P whr R is th xpctd rvnu for a priod of holding, P is th xpctd pric of an asst at th nd of a priod and P is th currnt pric of an asst (Sharp, 1995). As w can conclud from th formula abov, chang of th xpctd pric straightly impacts invstors bhavior. But thr is a rasonabl qustion: dos th chang of th xpctd pric of gold impact invstors dmand or quantity dmandd? Th answr dpnds on th natur of forming invstors pric xpctations, on th factors that influncd this procss: ndognous or xognous rlativly to th modl. If th xpctd pric is formd on th basis of ndognous variabls it lads to quantity dmandd changs. And if th xpctd pric is formd on th basis of xognous variabls it lads to changs in dmand. In our modl pric signals ar ndognous variabls. 150

4 Analyzing of pric prformanc ovr som priod of tim on th markt is on of th main ways of forming pric xpctations of invstors. This analysis can b dividd into two parts: historical prics analysis and prsnt prics analysis. In othr words, past and prsnt pric changs ar th main variabls forming xpctd pric. Corrsponding with this, xpctd pric can b prsntd as a simpl function: t P f( 1 t P ; ), whr t-1 is th pric chang in th past priod of tim (t-1), t is th pric chang in th currnt priod of tim t. Thus, chang in th xpctd pric, formd in aforsaid way, lads to chang in quantity dmandd by invstors, othr things bing constant: Q di t f( P ), P f( 1 t ; ), Q d i whr is th quantity of gold dmandd by invstors. This functional rlationship btwn th xpctd pric and th quantity of gold dmandd by invstors is schmatically shown as a curv in Figur 1. Fig. 1. Th rlationship btwn xpctd pric of gold and quantity dmandd by invstors If th xpctd pric of gold P 1 at whichh th quantity dmandd by invstors is Q 1 incrass to P 2 thn th quantity dmandd incrass to Q 2. Th highr th xpctd pric, th highr th quantity of gold is dmandd by invstors. Th lowr th xpctd pric of gold, th lowr th quantity dmandd. Othr things ar constant. Consquntly, D i 0, (2) (3) (4) whr Di is a chang in th quantity of gold dmandd by invstors, is a chang in th xpctd pric of gold. Thrfor, th invstmnt dmand for gold function can b prsntd in this simpl way: Q di t f( P; P ( 1 t ; )). (5) Thr ar two main ndognous variabls in this function: th currnt and th xpctd prics of gold. So, th invstmnt dmand for gold curv is schmatically prsntd in Figur 2. Fig. 2. Invstmnt dmand for gold curv This curv is conditionally dividdd into two sgmnts: AB and BC. Invstor s xpctations of tndncy (dirction) of pric changs of gold ar formd on th sgmnt AB. As w can s from Figur 2 this sgmnt is prfctly inlastic. So thr ar no changs in th quantity dmandd by an invstor in rspons to pric changs whn h is forming xpctations about pric of gold tndncy. At this sgmnt th invstor analyzs informationn rvald throughh prics on th gold markt to constructt his forcast about dirction of pric changs. Lt s assum that th pric incrass from P 1 to P 2. It is supposd that this pric incras lads to forming positiv xpctations of pric tndncy on th gold markt. In othr words invstor xpcts furthr incras in pric of gold. Corrsponding with this and taking into account th pric incras from P 2 to P 3, invstor incrass th quantity dmandd from Q 1 to Q 2 at BC sgmnt. In doing this, invstor xpcts furthr incras in pric. As w can conclud from this situation, th xpctd pric is formd by th invstor on both AB and BC sgmnts of th curv. In this sns sgmnt AB can b charactrizd as th invstor s analysis of pric prformanc in th past priod of tim and BC can b charactrizd as analysis of pric prformanc in th momnt of making a dcision. It mans thatt th xpctd pric is formd on th basiss of past and currnt information rvald through prics of gold. As w said bfor, th invstor incrass amount of gold purchasd sinc h xpcts that pric will ris. And for him th xpctd pric is biggr than th currnt on. It was assumd that th invstor formd his xpctations about th dirction of pric changs on th AB sgmnt corrctly. H xpctd incras in 151

5 pric lvl and his xpctations wr corrct. Our assumption in this modl is that information rvald through prics is adquat and authntic. In th prvious situation it was supposd that th quantity of gold dmandd by an invstor in th priod of forming xpctations about th dirction of pric changs was Q 1. Howvr, it can b th cas in which th initial quantity of gold dmandd by invstor is qual to zro. This situation is prsntd in Figur 3. Fig. 3. Invstmnt dmand for gold curv with initial zro quantity of gold dmandd by invstor So, for AB sgmnts of concrnd curvs this simpl quation is appropriat: D i 0, (6) whr D i is a chang in th quantity of gold dmandd by invstor, is a chang in th currnt pric of gold. In turn positiv sloping BC sgmnts ar charactrizd by this simpl inquation: D i 0. (7) For th whol concrnd curvs this simpl inquation is implmntd: D i 0. (8) As w said bfor, invstor s xpctations of tndncy (dirction) of pric changs of gold ar formd on th sgmnt AB whr an invstor obsrvs th gold markt and dosn t undrtak any actions in rspons to pric changs. But how long dos this procss last? How much tim dos an invstor us to form his xpctations of tndncy of pric changs? Th answrs to ths qustions dpnd on individual faturs of a particular invstor, risk avrsion, rationality, tc. It is important to undrlin that th currnt and th xpctd pric ratio has a vry significant maning in analyzing spculators actions. If th xpctd pric of gold is highr than th currnt on, it will b an incntiv for spculators to buy gold. Thrfor, an ssntial condition for incrasing th quantity of gold dmandd by invstors is as follows: P 1. P (9) Othrwis, th ssntial condition for dcrasing of th quantity of gold dmandd by invstors is as follows: P 1. P (10) In th priod of forming of xpctations of pric changs dirction th xpctd pric is qual to th currnt on. And th quantity of gold dmandd by invstors dosn t chang: P 1 Q 0, P (11) whr Q is a chang in th quantity of gold dmandd by invstors. 3. Pric priod whr gold is ovrstimatd Positiv raction of invstors to incras in th pric of gold can t last indfinitly. Whn th pric of gold xcds som point, gold bcoms an ovrstimatd asst. Whn aspiring to quilibrium, th markt will prvnt furthr incras in th pric of gold. It mans that whn gold bcoms ovrstimatd, th quantity of gold dmandd by invstors dcrass in rspons to incras in pric. Th invstmnt dmand for gold curv will hav a ngativ slop in th cas of ovrstimation of gold. This situation is prsntd in Figur 4. As w can s from Figur 4, incras in th pric of gold from P 1 to P 2 causs incras in th quantity dmandd from Q 1 to Q 2. But furthr incras in th pric from P 2 to P 3 causs dcras in th quantity dmandd from Q 2 to Q 3. This is bcaus gold is considrd to b ovrstimatd whn its pric is ovr P 2. Whn gold is ovrstimatd, th xpctd pric of this asst is lowr than th currnt on, i.. invstors xpct dcras in th pric lvl. Fig. 4. Pric priod whr gold bcoms ovrstimatd 152

6 4. Pric priod whr gold is undrstimatd Ngativ raction of invstors to dcras in th pric of gold has its limit. This limit is dfind by th pric, blow which gold is considrd to b undrstimatd. For xampl this pric can b qual to minimal gold mining costs pr ounc. Whn th pric of gold dcrass blow this minimal pric, th invstmnt for gold dmand curv bcoms ngativly sloping. This situation is prsntd in Figur 5. As w can s from Figur 5, dcras in th pric of gold from P 1 to P 2 causs dcras in th quantity dmandd from Q 1 to Q 2. But furthr dcras in pric from P 2 to P 3 causs incras in quantity dmandd from Q 2 to Q 3. That is bcaus gold is considrd to b undrstimatd whn its pric is blow P 2. Whn gold is undrstimatd, th xpctd pric of this asst is highr than th currnt on, i.. invstors xpct incras in th pric lvl. Fig. 5. Pric priod whr gold bcoms undrstimatd 5. Pric priods whr gold is corrctly and incorrctly stimatd Thr is a pric priod whr gold is corrctly stimatd and th invstmnt dmand for gold curv has a positiv slop. This pric priod is situatd btwn two pric priods whr gold is ovrstimatd and undrstimatd and nar quilibrium pric. It was said that whn gold is not corrctly stimatd (ovrstimatd or undrstimatd) th invstmnt dmand for gold curv is ngativly sloping. Whn this invstmnt asst is considrd to b incorrctly stimatd, th markt sks to rturn its cost to bordrs of normal pric rang within which an quilibrium pric of an asst fluctuats. And th spd of this procss is dfind by th lvl of markt fficincy. Efficint markt hypothsis stats that markt is fficint concrning any information if it is compltly rflctd in th asst pric and this procss lasts for a minimal priod of tim (Burton, 2003). Aspiration of th markt to an quilibrium stat according to thorists of classical conomics is its intgral part (Samulson, 1947). Thus, according to Adam Smith th invisibl hand of th markt coordinats distribution of markt rsourcs at which quilibrium is rachd (Smith, 1904). 6. Dtrminants of invstmnt dmand for gold W hav considrd th dynamics of ndognous variabls which ar dtrminants of th quantity dmandd in this modl. Thus, changs in ths variabls lad to moving along th invstmnt dmand for gold curv. In this sction, w considr th dynamics of xognous variabls which ar dtrminants of dmand in this modl and changs in ths variabls lad to shifting of th invstmnt dmand for gold curv. Thr ar many dtrminants of invstmnt dmand for gold. Consquntly, w tak into considration factors that ar prvailing. Expctations of prics that ar not formd on th basis of information rvald through prics, i.. xpctations formd xognously, ar th important dtrminants of invstmnt dmand for gold. Changs in invstmnt dmand ar also drivn by changs in financial capability of invstors. Th most important dtrminants of invstmnt dmand for gold ar fiscal and montary policis and macroconomic statistics of th biggst opn conomis. Dtrminants of invstmnt dmand for gold also ar: rat of inflation in th biggst opn conomis, rat of incras in th world mony supply, xchang rats of rsrv currncis, profitability of altrnativ financial assts, th conomic and political situation in th world, intrst rats. 7. Pric lasticity of invstmnt dmand for gold In this sction w considr som of th main factors influncing pric lasticity of invstmnt dmand for gold Markt stratgy of invstor and his raction to markt signals. Evry conomic individual racts to markt signals, for xampl prics, diffrntly as wll as vry invstor has his own markt stratgy. Both ths factors dfin pric lasticity of any particular invstor Individual markt boundaris. Pric lasticity of invstmnt dmand for gold dpnds on an invstor s vision of markt boundaris. In turn, this vision of markt boundaris ultimatly influncs th quantity of substitut assts for an invstor. So, th widr th markt boundaris for th invstor, th biggr amount of substitut assts ar for him and thus th highr his pric lasticity on th markt of gold invstmnt. And th narrowr th markt boundaris for th invstor, th smallr amount of substitut assts ar for him and thus th lowr his pric lasticity. 153

7 7.3. Availabl tim. Th mor tim is availabl for analysis and dcision-making procss of an invstor, th highr his pric lasticity of dmand. And th lss tim is availabl for him to analyz markt and mak a dcision, th lss his pric lasticity of dmand Rat of inflation. If th rat of inflation incrass, pric lasticity of an invstor dcrass. This is bcaus in th priod of incrasing of rat of inflation thr is dcras in dmand for substitut assts. But if th rat of inflation dcrass, pric lasticity of th invstor incrass. It was prviously said that rat of inflation acts as a dtrminant of invstmnt dmand for gold as wll as a dtrminant of pric lasticity of invstmnt dmand for gold. On th on hand, rat of inflation influncs capital inflow and outflow on th markt of gold invstmnt and thus impacts on th invstmnt dmand for gold. But on th othr hand, rat of inflation also influncs dmand for substitut assts which in turn dtrmin pric lasticity of invstmnt dmand for gold. Thus rat of inflation has a complx impact on th invstmnt dmand for gold. 8. Incom and substitution ffcts on th markt of gold invstmnt It is known that in conomic thory dmand curv traditionally has a ngativ slop. It is causd by th incom and substitution ffcts. Howvr, thr ar svral xclusions: for xampl dmand curvs plottd for Vbln s and Giffn s good ar positivly sloping (Vbln, 1899; Hijman, Mouch, 2012). It mans that ths two ffcts do not always prvail. In this sns, it is ncssary to analyz th rol of ths ffcts on th markt of gold invstmnt. Th incom ffct has a limitd impact on th invstmnt dmand sinc th main flow of invstmnt in gold is drivn by institutional invstors which oprat a larg amount of financial capital. In th cas of individual invstors, th incom ffct prvails but in th cas of institutional invstors, it dos not. Th substitution ffct is basd on th prsnc of substitut assts. But gold is traditionally known as a uniqu financial asst in th sns of prsrving Rfrncs walth and protction from inflation and conomic shocks. Gold is on of th bst divrsifirs of invstmnt portfolio (World Gold Council, 2013). In this rason, th amount of substitut assts on th markt of gold invstmnt is xtrmly rstrictd and thus th substitution ffct is not oftn prvailing on this markt. Thrfor, th incom and substitution ffcts do not prvail on th markt of invstmnt in gold. In turn, th ffct of xpctd incom is prdominant on this markt. And that is th main rason of a positiv slop of invstmnt dmand for gold curv in a prvalnt rang of pric lvls. Conclusions Incras in th pric of gold spcially for a long priod of tim lads to incras in th quantity dmandd for this asst by invstors, othr things bing constant. This is causd by pric xpctations that ar formd on th basis of information rvald through prics. That is th rason of a positiv slop of th invstmnt dmand for gold curv in a prvalnt rang of pric lvls. Howvr, thr ar two situations whn th invstmnt dmand for gold curv has a ngativ slop, i.. whn gold is ovrstimatd and whn it is undrstimatd. In our analysis w trid to show that pric xpctations play a ky rol on th markt of gold invstmnt and dirctly dtrmin invstors bhavior. So laws that usually prvail on th goods markt los thir prdominanc on th gold invstmnt markt. It is known that gold is considrd to b an asst which pric rflcts th world conomic situation. Th pric of gold rflcts not only supply and dmand dynamics but also th stat of th world conomy. Morovr, gold should b sn as a baromtr of global inflation, on that rsponds to inflationary prssurs in dvlopd markts as wll as in mrging markts (World Gold Council, 2013). Corrsponding with this, th pric of gold has a vry high informativ valu and can srv as a basis of forming xpctations of conomic individuals, spcially invstors. 1. Arrow K., Hurwicz L. (1962). Comptitiv Stability undr Wak Gross Substitutability: Nonlinar Pric Adjustmnt and Adaptiv Expctations, Intrnational Economic Rviw, Vol. 3, No. 2, pp Blanchard O. (1979). Backward and Forward Solutions for Economis with Rational Expctations, Th Amrican Economic Rviw, Vol. 69, pp Burton M. (2003). Th Efficint Markt Hypothsis and its Critics, Journal of Economic Prspctivs, Vol. 17, No. 1, pp Cagan P., Klin J. (1956). Studis in th Quantity Thory of Mony, Fridman M. (d), Chicago: Th Univrsity of Chicago Prss, 265 pp. 154

8 5. Fig E. (1967). Expctations and Adjustmnts in th Montary Sctor, Th Amrican Economic Rviw, Vol. 57, No. 2, Paprs and Procdings of th Svnty-ninth Annual Mting of th Amrican Economic Association, pp Futia C. (1981). Rational Expctations in Stationary Linar Modls, Economtrica, Vol. 49, No. 1, pp Grossman S. (1981). An Introduction to th Thory of Rational Expctations undr Asymmtric Information, Th Rviw of Economic Studis, Vol. 48, No. 4, pp Hijman W., Mouch P. (2012). Nw Insights into th Thory of Giffn Goods, Sris: Lctur Nots in Economics and Mathmatical Systms, Vol Kyns J. (1936). Th Gnral Thory of Employmnt, Intrst and Mony, London: Macmillan, 263 p. 10. Lucas R., Rapping L. (1969). Pric Expctations and th Phillips Curv, Th Amrican Economic Rviw, Vol. 59, No. 3, pp Mtzlr L. (1941). Th Natur and Stability of Invntory Cycls, Th Rviw of Economic Statistics, Vol. 23, No. 3, pp Mills E. (1961). Th Us of Adaptiv Expctations in Stability Analysis: A Commnt, Th Quartrly Journal of Economics, Vol. 75, No. 2, pp Muth J. (1961). Rational xpctations and th thory of pric movmnts, Economtrica, Vol. 29, No. 3, pp Ngishi T. (1964). Th Stability of Exchang and Adaptiv Expctations, Intrnational Economic Rviw, Vol. 5, No. 1, pp Nrlov M. (1958). Adaptiv Expctations and Cobwb Phnomna, Th Quartrly Journal of Economics, Vol. 72, No. 2, pp Radnr R. (1979). Rational Expctations Equilibrium: Gnric Existnc and th Information Rvald by Prics, Economtrica, Vol. 47, No. 3, pp Samulson P. (1983). Foundations of Economic Analysis, Harvard Univrsity Prss. 18. Sharp W., Alxandr G., Baily J. (1995). Invstmnts, Fifth dition, Prntic Hall Intrnational Inc., 1027 p. 19. Smith A. (1759). Th Thory of Moral Sntimnts, D.D. Raphal and A.L. Macfi (d.), Vol. 1 of th Glasgow Edition of th Works and Corrspondnc of Adam Smith, Indianapolis: Librty Fund, rprintd 1982, 405 p. 20. Smith A. (1904). An Inquiry into th Natur and Causs of th Walth of Nations, London: Mthun and Co., Ltd., Fifth dition. 21. Tirol J. (1982). On th possibility of spculation undr rational xpctations, Economtrica, Vol. 50, No. 5, pp Vbln T. (1899). Th Thory of th Lisur Class, An Economic Study of Institutions, London: Macmillan Publishrs. OCLC Numbr: Vrrcchia R. (1982). Information acquisition in a noisy rational xpctations conomy, Economtrica, Vol. 50, No. 6, pp Vroom V. (1964). Work and motivation, Nw York: Wily, 331 pp. 25. World Gold Council (2013). Gold Invstor, Risk Managmnt and Capital Prsrvation, Vol

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