Gold and inflation(s) – A time-varying relationship

Abstract

What is the relationship between the price of gold and inflation? How stable is it -over time and across measures of inflation? We examine this for three countries (the USA, the UK and Japan) over forty years and with a variety of measures of inflation and monetary liquidity. We apply a formal test for time variation and proceed to extract time varying cointegration relationships. Both formal and graphical evidence points to a break in the relationship(s) of gold and official inflation in the mid 1990s in the USA but to less clear results for the UK and Japan. However, gold seems to have offered a protection against an increase in money supply throughout nearly the entire past 40 year period in the US and the UK but failed to do so in Japan. Supporting previous findings we find evidence for a time-varying relationship in cointegration between gold and both predicted and realized inflation in nearly all cases. Contrasting multiple inflation indicators, we find evidence for the importance of money supply in the gold/inflation relationship.

Gold and inflation: Expected inflation effect or carrying cost effect?

“…For example, Iqbal () reported that gold hedges inflation risk in the United States only during average and bearish conditions of the gold market but not during bullish trends. Lucey, Sharma, and Vigne () found evidence for a time‐varying cointegration relationship between gold and both predicted and realized inflation. Moreover, previous studies shed no light on the causality between gold returns and inflation expectation.…”

Global Determinants of the Gold Price: A Multivariate Cointegration Analysis

“…Second, Lucey et al . () found that the relationship between gold and measures of inflation and monetary liquidity in three countries (the United States, the United Kingdom, and Japan) is time‐varying. It would hence be interesting to find out whether the relationship between global liquidity and gold is also time‐varying.…”

“…My hypothesis hence is that the gold price would be influenced by the gap between real money and real output. Furthermore, gold could co‐move with inflation as Figure indicates over the first half of the sample, while this relationship may have broken down during the 1990s (similar to the country‐level findings by Lucey et al ., ). How could these visual observations be interpreted?…”

“…Using among other narrow money for the United States, the United Kingdom, and Japan, Lucey et al . () found that the relationship between gold and official inflation presents a break in the mid‐1990s in the United States. The same break is not clearly seen for the other two countries.…”

Future directions in international financial integration research - A crowdsourced perspective

“…Here the examples are numerous, particularly in regards to strategic metals (rare-earth elements such as indium, iridium, rhodium) and precious metals. Recent contributions include Batten et al (2010), Aruga and Managi (2011), Mancheri andMarukawa (2016), O'Connor et al (2015), Lucey et al (2016), Ge et al (2016), and Lau et al (2017) -see also the special issue on white metals in this journal. Indeed, in that spirit, a change in the nature of white precious metals can be observed, shifting from commodities to investment assets (Vigne et al (2017)).…”