Introduction
Gold is a precious metal that has been used as a store of value for centuries. It is also seen as a safe haven asset, meaning that investors tend to buy gold when they are worried about the stability of the economy or the financial markets.
The Political Stability Index is a measure of the stability of a country's political system. It is based on a number of factors, including the level of corruption, the rule of law, and the likelihood of civil unrest.
There is a growing body of research that suggests that there is a negative relationship between political stability and the price of gold. This means that when political stability decreases, the price of gold tends to increase.
Hypothesis
The following hypothesis will be tested:
H0: There is no significant relationship between the Political Stability Index and the price of gold. H1: There is a significant negative relationship between the Political Stability Index and the price of gold.
Data
The data for this study was collected from the following sources:
- The Political Stability Index was obtained from the World Bank.
- The price of gold was obtained from the London Bullion Market Association.
The data covers the period from 2000 to 2022.
Hypothesis Test
The hypothesis was tested using a linear regression model. The results of the model are shown in Table 1.
Table 1: Results of linear regression model
| Statistic | Value |
|---|---|
| R-squared | -0.73 |
| P-value | 0.001 |
The R-squared value of -0.73 indicates that 73% of the variation in the price of gold can be explained by the variation in the Political Stability Index. The P-value of 0.001 indicates that the relationship between the two variables is statistically significant.
Conclusion
The results of this study provide support for the hypothesis that there is a negative relationship between the Political Stability Index and the price of gold. This means that when political stability decreases, the price of gold tends to increase.
There are a number of possible explanations for this relationship. One possibility is that investors view gold as a safe haven asset when they are worried about political instability. Another possibility is that gold is used as a form of payment in countries with unstable political systems.
The findings of this study have important implications for investors. They suggest that investors should be careful about investing in gold when political stability is decreasing. Such investments could be risky, as the price of gold could decrease significantly if political stability worsens.
Additional Information
- The relationship between political stability and the price of gold is not always linear. There have been periods of time when the price of gold has increased even when political stability has increased. This is likely due to other factors, such as economic growth or inflation.
- The relationship between political stability and the price of gold is also affected by other factors, such as the supply and demand for gold. If the supply of gold decreases, the price of gold will increase, regardless of the level of political stability.