GOLD AS AN INFLATION HEDGE

GOLD AS AN INFLATION HEDGE This paper attempts to reconcile an apparent contradiction between shortrun and longrun movements in the price of gold. The theoretical model suggests a set of conditions under which the price of gold rises over time at the general rate of inflation and hence be an effective hedge against inflation. The model also demonstrates that shortrun changes in the gold lease rate, the real interest rate, convenience yield, default risk, the covariance of gold returns with other assets and the dollarworld exchange rate can disturb this equilibrium relationship and generate shortrun price volatility. Using monthly gold price data 19761999, and cointegration regression techniques, an empirical analysis confirms the central hypotheses of the theoretical model. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Studies in Economics and Finance Emerald Publishing

GOLD AS AN INFLATION HEDGE

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Abstract

This paper attempts to reconcile an apparent contradiction between shortrun and longrun movements in the price of gold. The theoretical model suggests a set of conditions under which the price of gold rises over time at the general rate of inflation and hence be an effective hedge against inflation. The model also demonstrates that shortrun changes in the gold lease rate, the real interest rate, convenience yield, default risk, the covariance of gold returns with other assets and the dollarworld exchange rate can disturb this equilibrium relationship and generate shortrun price volatility. Using monthly gold price data 19761999, and cointegration regression techniques, an empirical analysis confirms the central hypotheses of the theoretical model.

Journal

Studies in Economics and FinanceEmerald Publishing

Published: Jan 1, 2004

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