Gold Derivatives: Gold Derivatives: - World Gold Council

Cumulative abnormal return
1.5%
1.0%
Impact of Hedging on Gold Price
More Hedging
Less Hedging
0.5%
0.0%
-0.5%
-6 -5 -4 -3 -2 -1 0 1 2
-1.0%
Days relative to announcement
-1.5%
Source: Own calculations based on Gold and Silver Hedging Outlook, Scotia Capital.
The figures for the abnormal return on the gold price on the day of the announcement,
and over the three trading days centred on the announcement, are as follows
(figures in parentheses are standard errors 1 ):
Abnormal
Return
Increased
Hedging
Decreased
Hedging
Day T -0.66%
(0.30%)
Day T-1 to T+1 -1.05%
(0.55%)
+0.51%
(0.42%)
+1.21%
(0.55%)
The abnormal returns are the sign one would expect if hedging depresses the gold
price – increased hedging is bad for the gold price, while decreased hedging causes
it to rise. The wider window (day T-1 to T+1) probably gives a fuller picture of
the price impact than the one day return because it allows for some news leakage
prior to the announcement as well uncertainty as to when the announcement
took place on day T relative to the gold price fixing.
The estimates for the impact of both an increase and a reduction in hedging are
similar in magnitude, and they verge on the statistically significant at conventional
1
Standard errors are calculated from the average observed volatility of returns in the gold market in the
period leading up to each announcement. We calculate one day and three day exponentially weighted
squared returns, with a decay factor of 0.9/day. We followed this procedure to take account of the fact
that hedging announcements seem to occur at times of high market volatility, and also to allow for the
possibility of auto-correlation in returns.
Gold Derivatives: The market impact 71