The Impact of Advanced Economy Monetary Policy on Gold Price Dynamics in India

Abstract

Gold remains a dynamic investment tool in many economies and is considered a safe- haven during times of crises. The sheer size of the US economy and hence any monetary policy decisions have implications for the global economy and global assets. Since commodities are priced in the US dollar, transmission of shocks to asset prices is bound to happen as investors rebalance portfolio. Now, the direction of movement in gold prices depends on other factors as well. Against this backdrop, we examine the impact of US monetary policy on gold prices in India and try to examine how monetary policy announcements during the pandemic by the Fed has influenced domestic gold prices. Further, we investigate the determinants of domestic gold prices using an ARDL model and find that prices have moved closely with global economic policy uncertainty, thereby demonstrating its safe haven feature and have risen with domestic CPI inflation, thus proving to be an inflation hedge. Thus, the study is expected to upgrade the understanding on the behaviour of investors towards gold, and information processing under uncertainty. JEL Classification: G10, G15.