Chinese New Year And International Gold Markets

Today, China is the world’s leading gold producer and its second largest consumer. Traditionally imposing strict regulations on its gold market, China has ushered in a process of liberalisation a decade ago, encouraging individual gold trading, gold import and export. A boom in domestic demand for gold has been triggered, the majority of which is constituted by purchases of jewelry. Demand seasonality is, among others, determined by the Chinese New Year festival, as the traditional gift of red envelopes with cash has, in recent years, increasingly been replaced by jewelry. The present study is an effort to investigate whether there is a discernible impact of this festival on the distribution of returns on gold prices, as fixed at the London bullion market. Specifically, we fit a combined GARCH and regression model, including dummy variables indicating the festival, to daily gold price changes. We show that a significant impact could be observed shortly after the beginning of the year of the dragon on February 5th, 2000, for the first time, and has persisted since then in the sense that conditional return expectation increases with the festival and stays at an elevated level for some days after the festival, while there is no significant impact on return variability. Our findings help investors in the gold market understand market dynamics and provide empirical evidence for a phenomenon which is not comprehensively covered in official statistics. Finally, we point out consequences of our findings concerning the Chinese gold market to economic policy formulation.