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An examination of Australian gold mining firms’ exposure over the collapse of gold price in the late 1990s

Victor Fang (Department of Accounting and Finance, Monash University, Caulfield, Australia)
Chien‐Ting Lin (International Graduate School of Management, Division of Business and Enterprise, University of South Australia, Adelaide, Australia, and)
Warren Poon (Department of Accounting and Finance, Monash University, Caulfield, Australia)

International Journal of Accounting & Information Management

ISSN: 1834-7649

Article publication date: 31 May 2007

1063

Abstract

Purpose

The purpose of this study is to examine the exposures of Australian gold mining firms in the highly volatile period from 1995 to 2000. This period has been characterized by significant changes in gold price due to bulk sale of gold by collective central banks. Specifically, the paper aims to investigate several firm‐specific factors that are hypothesized to carry substantial influence on gold beta.

Design/methodology/approach

To estimate gold beta, we use the following multifactor model: Rg,t = α + βg GPRt + βx FXRt + βm Rm,t + εt, where Rg,t is the return on the gold stock Index at time t, GPRt is the gold price return denominated in US dollar at time t, FXRt is the foreign exchange return of Australian dollar in terms of US dollar at time t, Rm,t is the market return at time t, and εt is the random error term at time t.

Findings

The paper finds that the values of gold beta are consistently greater than one, implying the sensitive nature of firms’ stock returns to gold price changes. This also suggests that investors holding gold mining stock would receive higher percentage increases in stock returns from a percentage increase in gold price returns, as opposed to investors holding gold bullion. Furthermore, these values have changed substantially over time with significant changes in gold price volatility. The most important and consistent relationship that we find is the impact of firms’ hedging behavior on their respective gold betas. This is consistent with Tufano's study. It implies that firms, which hedge a greater proportion of their gold reserves, are less sensitive to movements in gold prices. The finding therefore supports the risk management theory that hedging increases shareholder's wealth. However, cash operating costs, cash reserves and the level of gold production seem to influence very little on the firms’ exposure to gold price changes.

Originality/value

This study is of interest and important to the stock mining companies and investors because the extent of the effect of gold price movements on the stock returns of gold mining companies has significant impacts on returns for both firms and investors especially in their risk management and investment decisions, respectively.

Keywords

Citation

Fang, V., Lin, C. and Poon, W. (2007), "An examination of Australian gold mining firms’ exposure over the collapse of gold price in the late 1990s", International Journal of Accounting & Information Management, Vol. 15 No. 2, pp. 37-49. https://doi.org/10.1108/18347640710837344

Publisher

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Emerald Group Publishing Limited

Copyright © 2007, Emerald Group Publishing Limited

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