Gold investment as an inflationary hedge: cointegration evidence with allowance for endogenous structural breaks

Abstract

This note tests for the presence of a stable long-run relationship between the monthly price of gold and inflation in the United States from 1945 to 2006 and from 1973 to 2006. Since both the price of gold and the consumer price index have been subject to structural change over time, a novel unit root testing procedure is employed which allows for the timing of significant breaks to be estimated, rather than assumed exogenous. After taking these endogenously determined structural breaks into account, a modified cointegration approach provides strong evidence of a cointegrating relationship between gold and inflation in both the post-war period and since the early 1970s. The results lend support to the widely held view that direct and indirect gold investment can serve as an effective inflationary hedge.

The Volatility–Variability Hypotheses Testing and Hedging Effectiveness of Precious Metals for the Indonesian and Malaysian Capital Markets

“…These precious metals have advantages, because of their durability, and can act as a hedge towards inflation (Beckmann and Czudaj 2012;Dee et al 2013;Ghosh et al 2004;Tkacz 2007;Worthington and Pahlavani 2007). Hammoudeh et al (2010) even concluded that precious metals could also act as a hedge for exchange rates.…”

Gold as an Inflation Hedge in a Time-Varying Coefficient Framework

“…In their framework, the timing of structural breaks is endogenously determined by applying the unit root testing procedure developed by Zivot and Andrews (1992) and thereafter a modified cointegration approach suggested by Saikkonen and Lütkepohl (2000a, 2000b, 2000c) is adopted. The results provide evidence in favor of a cointegrating relationship between the price of gold and inflation in both sample periods and thus, Worthington and Pahlavani (2007) conclude that a gold investment can serve as an effective inflationary hedge. Finally, have analyzed the short-run and long-run inflation hedging effectiveness of gold in the USA and Japan for a sample period ranging from January 1971 to January 2010 while using monthly data.…”

“…Kolluri (1981), Moore (1990), Laurent (1994), Chappell and Dowd (1997), Mahdavi and Zhou (1997), Harmston (1998), Ghosh et al (2004, Levin and Wright (2006), Worthington and Pahlavani (2007) and examine the inflation hedge effectiveness of gold by focusing on the short-run and the long-run relationship between the general price level and the price for gold. It is worth mentioning that studies which focus on 'safe haven' aspects mostly adopt daily instead of monthly data.…”

“…Gold prices seem to be appropriate regarding the reflection of inflation expectations since, in contrast to many other commodities, gold is durable, relatively transportable, universally acceptable and easily authenticated (Worthington and Pahlavani, 2007). From a theoretical point of view, an increase in expected inflation will force investors to buy gold, either to hedge against the expected decline in the value of money or to speculate due to the associated rise of the gold price.…”

The Safe Haven Property of Gold in Turkish Financial Markets: An Investigation of the Global Financial Crisis

“…Tully and Lucey (2007) conclude that the US dollar is the major determinant for gold returns. Capie et al (2005) evidence the hedging quality of gold against the dollar while Sherman (1982); Baker and Van-Tassel (1985); Kaufmann and Winters (1989); Sjaastad and Scacciavillani (1996); McCown and Zimmerman (2006); Worthington and Pahlavani (2007); Wang et al (2011);Beckmann and Czudaj (2013) adduce the inflation-hedging trait of gold. Kutan and Aksoy (2004) contrarily document that gold does not carry the inflation hedging quality in Turkey.…”