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Relationship Between Exchange Rate Volatility And Gold Mining Sector

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Question:

Discuss about the relationship between exchange rate volatility and gold mining sector share prices in South Africa.
 
 

Answer:

Introduction

The study focuses on the relationship between exchange rate volatility and gold mining sector share prices in South Africa. Commodity exporting nations face long term fluctuations in trade that render their exchange rate volatility. Rising volatility in exchange rate adversely impacts on the economy through its consequences on agent’s consumption as well as investment decisions. South Africa being one of the largest manufacturers of gold has exposure to exchange rate volatility. Increase in exchange rate volatility adversely impacts on the gold mining sector share prices (Wesseh and Niu 2012). The present research proposal also highlights on how liberalization of capital account changed the relation between exchange rate volatility and share price of gold mining sector. Section 2 discuses about the rationale for research and statement for research purpose. Section 3 and 4 gives an overview about the literature review and research methodology. The last section reflects on the ethical considerations of this research.

Background

Excessive volatility in exchange rate usually influences the nation’s economic decision making.  South African Rand (ZAR) has been usually characterised historically with volatilities, the current level of currency gyrations especially against the US currency has been unprecedented (Gajigo, Mutambatsere and Mdiaye 2012).  The ZAR exchange rate is usually driven by the demand as well as supply. As gold is one of the most vital export minerals in the nation, it has strong impact on its exchange rate. Depreciation of the currency might lead to threat to most of the manufacturing industries in this nation.   

 

Research problem statement

The problem statement of this research study is the extent to which the volatility in exchange rate affects the share prices of the gold mining sector in South Africa. Investors usually influence the gold price by investing in this market (Aron et al. 2014). This means that the investors might not invest in the gold market owing to lack of availability of these resources.

Rationale for research

The rationale for this research is to describe about the fact that how the fluctuations in exchange rate influences the gold mining stocks and its share prices. The aim of the researcher is to overview on how the increase in volatility of exchange rate has affected trade as well as employment in South Africa.

Statement of research purpose

This research study will explore about how the policymakers of this nation should enact intervention policies for reducing volatility in exchange rate for improving their gold mining export sector and its share prices.

Research questions

  • Does volatility in exchange rate increases the production level of the gold mining sector and its share price?
  • Does the capital account liberalization change the relationship between exchange rate volatility and share price of gold mining sector?
  • Do fluctuations in exchange rate adversely impacts on the gold mining sector in South Africa?

Assumptions

It can been assumed in this research study that the international investors seeking exposure to the price of gold invests in the short run, which in turn leads to rise in volatility of exchange rate with harmful effect on  investment as well as growth.   

 

Literature review

This section focuses on the correlation between the exchange rate volatility and share prices of the gold mining sector in South Africa. The fluctuations in both the gold price and exchange rate plays vital role in this nation by persuading the confidence of the investors. Both the importers as well as exporters in South Africa, which trade with this nation also comprises of vital source of demand as well as supply of local currency. In South Africa, this exchange rate has been considered as an important macroeconomic policy that ensures promotion of export and growth in the economy (Hajilee and Nasser 2014). In addition, exchange rate influences international trade in hedging nature and by fixing the prices of goods. Bussière, Delle and Peltonen (2014) opines that increase in volatility of exchange rate of 2.3 % usually decreases trade by 3%. There are mainly two basic reasons behind the increase in prices of gold. Firstly, in the recessionary period or crash in global financial market, investors usually do not trust of investing in the financial market. As a result, they switch to other market where it has less unpredictability that includes gold market. Secondly, devaluation of US currency versus other currencies increases the gold prices. Floating exchange rate is one of the main sources of instability of price on the gold market. Fluctuation in exchange rate shows the variation in real value of currency. However, depreciation of currency value increases exchange rate and vice versa (Hassan 2013). This means that fall in currency value decreases the purchasing power of money and hence financial assets falls. This encourages the investors in investing in the gold market and this in turn increases the share prices of the gold mining sector.

Research methodology

The researcher has conducted secondary research for analyzing the relationship between the exchange rate volatility and gold mining sector share prices in South Africa.

Research design

There are mainly three kinds of research design including explanatory, exploratory and descriptive. Exploratory research design signifies the research design in which the researcher investigates the situation, which provides insights about the topic. Explanatory research design indicates the design in which the researcher connects ideas in order to determine cause and affect relationship. Descriptive research design refers to the design in which the researcher tries to explore and describe additional information relating to the research study.  In this specific research study, the researcher has applied descriptive research design as it uses secondary data for conducting the investigation about the known facts.

 

Data collection

The researcher has gathered data from the published articles, websites and books that connect with the research objectives.  In fact, the researcher collected qualitative data as the study is based on the secondary data (Silverman 2016).

Reliability and validity

The reliability of gathered data has been ensured by collecting information from the sources that are reviewed by peers as well as certified by scholar. As the data has been gathered from secondary sources, it is necessary to determine its feasibility and authenticity. The validity of the data should not go beyond limitation. Any information given in website becomes valid only when new data releases as it makes older information obsolete. As the information has been collected from secondary sources, the validity of given data cannot be guaranteed.

Sampling strategy

The sampling strategy that has not been applied in this study as it uses secondary data and thematic analysis in which data has been generated from journal articles, authentic websites, books etc. The sample size is total number of articles, books and news applied in this study.

 

Data analysis

The researcher has gathered qualitative data through thematic data analysis as the study relies on the secondary data. In this type of analysis, the researcher uses information from the valid sources and then aim at drawing conclusion from this in order to get accurate outcome.

Ethical considerations

While conducting any research, the researcher must abide by the regulations as well as rules of research.  Ethical issues should also be considered while analyzing this research study. In addition, the researcher must also follow particular code of conduct while conducting this research. As information has been collected from secondary sources, the researcher tried to extract the data from reliable sources for avoiding any types of discrepancies. It also helped the researcher in achieving accurate outcome for this research study

 

References

Aron, J., Farrell, G., Muellbauer, J. and Sinclair, P., 2014. Exchange rate pass-through to import prices, and monetary policy in South Africa. Journal of Development Studies, 50(1), pp.144-164.

Bussière, M., Delle Chiaie, S. and Peltonen, T.A., 2014. Exchange rate pass-through in the global economy: the role of emerging market economies. IMF Economic Review, 62(1), pp.146-178.

Chkili, W. and Nguyen, D.K., 2014. Exchange rate movements and stock market returns in a regime-switching environment: Evidence for BRICS countries. Research in International Business and Finance, 31, pp.46-56.

Combes, J.L., Kinda, T. and Plane, P., 2012. Capital flows, exchange rate flexibility, and the real exchange rate. Journal of Macroeconomics, 34(4), pp.1034-1043.

Gajigo, O., Mutambatsere, E. and Mdiaye, G., 2012. Gold mining in Africa: Maximizing economic returns for countries(Vol. 147). Tunis, Tunisia: African Development Bank.

Hajilee, M. and Al Nasser, O.M., 2014. Exchange rate volatility and stock market development in emerging economies. Journal of Post Keynesian Economics, 37(1), pp.163-180.

Hassan, S., 2013. South African capital markets: An overview. South African Reserve Bank Working Paper, (2013-04).

Mlambo, C., Maredza, A. and Sibanda, K., 2013. Effects of exchange rate volatility on the stock market: A case study of South Africa. Mediterranean Journal of Social Sciences, 4(14), p.561.

Silverman, D. ed., 2016. Qualitative research. Sage.

Wesseh Jr, P.K. and Niu, L., 2012. The impact of exchange rate volatility on trade flows: new evidence from South Africa. International Review of Business Research Papers, 8(1), pp.140-165

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