IDEAS home Printed from https://ideas.repec.org/a/eee/jrpoli/v79y2022ics0301420722004524.html
   My bibliography  Save this article

When is gold an effective hedge against inflation?

Author

Listed:
  • Valadkhani, Abbas
  • Nguyen, Jeremy
  • Chiah, Mardy

Abstract

Using threshold and piecewise regression models on monthly data (January 1969–March 2021), we examine the asymmetric effects of inflation and the US ten-year Treasury bond interest rate on gold price returns, identifying two distinct regimes. Inter alia, it is found that the responsiveness of gold returns to changes in inflation and interest rate depends on the magnitude of monthly inflation itself. Given the recent multi-trillion-dollar stimulus packages, the US is likely to switch into a ‘high’ inflation regime (as defined by our endogenously determined threshold), leading to gold once again becoming a potent hedge against inflation. The results support the view that when monthly inflation in the US exceeds 0.55%, gold exhibits significant responses to changes in both inflation and the ten-year Treasury interest rate. However, when inflation is moderate or low, gold remains somewhat non-responsive. We thus argue that such asymmetric and size-dependent responses are the main causes of the lack of consensus in the literature regarding the hedging capability of gold.

Suggested Citation

  • Valadkhani, Abbas & Nguyen, Jeremy & Chiah, Mardy, 2022. "When is gold an effective hedge against inflation?," Resources Policy, Elsevier, vol. 79(C).
    • Handle: RePEc:eee:jrpoli:v:79:y:2022:i:c:s0301420722004524
    DOI: 10.1016/j.resourpol.2022.103009
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0301420722004524
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.resourpol.2022.103009?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Salisu, Afees A. & Raheem, Ibrahim D. & Ndako, Umar B., 2020. "The inflation hedging properties of gold, stocks and real estate: A comparative analysis," Resources Policy, Elsevier, vol. 66(C).
    2. Baur, Dirk G. & McDermott, Thomas K., 2010. "Is gold a safe haven? International evidence," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1886-1898, August.
    3. Victor L Bernard & Thomas J. Frecka, 1983. "Evidence On The Existence Of Common Stock Inflation Hedges," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 6(4), pages 301-312, December.
    4. Wang, Kuan-Min & Lee, Yuan-Ming & Thi, Thanh-Binh Nguyen, 2011. "Time and place where gold acts as an inflation hedge: An application of long-run and short-run threshold model," Economic Modelling, Elsevier, vol. 28(3), pages 806-819, May.
    5. Ha, Jongrim & Kose, M. Ayhan & Ohnsorge, Franziska, 2023. "One-stop source: A global database of inflation," Journal of International Money and Finance, Elsevier, vol. 137(C).
    6. Dirk G. Baur & Brian M. Lucey, 2010. "Is Gold a Hedge or a Safe Haven? An Analysis of Stocks, Bonds and Gold," The Financial Review, Eastern Finance Association, vol. 45(2), pages 217-229, May.
    7. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July.
    8. Beckmann, Joscha & Czudaj, Robert, 2013. "Gold as an inflation hedge in a time-varying coefficient framework," The North American Journal of Economics and Finance, Elsevier, vol. 24(C), pages 208-222.
    9. Nicholas Taylor, 1998. "Precious metals and inflation," Applied Financial Economics, Taylor & Francis Journals, vol. 8(2), pages 201-210.
    10. Franses,Philip Hans & Dijk,Dick van, 2000. "Non-Linear Time Series Models in Empirical Finance," Cambridge Books, Cambridge University Press, number 9780521770415.
    11. Frederic S. Miskin & Klaus Schmidt-Hebbel, 2007. "Does Inflation Targeting Make a Difference?," Central Banking, Analysis, and Economic Policies Book Series, in: Frederic S. Miskin & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.),Monetary Policy under Inflation Targeting, edition 1, volume 11, chapter 9, pages 291-372, Central Bank of Chile.
    12. Sephton, Peter S., 2022. "Revisiting the inflation-hedging properties of precious metals in Africa," Resources Policy, Elsevier, vol. 77(C).
    13. Kristin J. Forbes & Joseph E. Gagnon & Christopher G. Collins, 2020. "Low Inflation Bends the Phillips Curve around the World," Working Paper Series WP20-6, Peterson Institute for International Economics.
    14. Urquhart, Andrew & Zhang, Hanxiong, 2019. "Is Bitcoin a hedge or safe haven for currencies? An intraday analysis," International Review of Financial Analysis, Elsevier, vol. 63(C), pages 49-57.
    15. Aye, Goodness C. & Carcel, Hector & Gil-Alana, Luis A. & Gupta, Rangan, 2017. "Does gold act as a hedge against inflation in the UK? Evidence from a fractional cointegration approach over 1257 to 2016," Resources Policy, Elsevier, vol. 54(C), pages 53-57.
    16. Aye, Goodness C. & Chang, Tsangyao & Gupta, Rangan, 2016. "Is gold an inflation-hedge? Evidence from an interrupted Markov-switching cointegration model," Resources Policy, Elsevier, vol. 48(C), pages 77-84.
    17. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
    18. Iqbal, Javed, 2017. "Does gold hedge stock market, inflation and exchange rate risks? An econometric investigation," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 1-17.
    19. Bampinas, Georgios & Panagiotidis, Theodore, 2015. "Are gold and silver a hedge against inflation? A two century perspective," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 267-276.
    20. Adekoya, Oluwasegun B. & Oliyide, Johnson A. & Oduyemi, Gabriel O., 2021. "How COVID-19 upturns the hedging potentials of gold against oil and stock markets risks: Nonlinear evidences through threshold regression and markov-regime switching models," Resources Policy, Elsevier, vol. 70(C).
    21. Bilgin, Mehmet Huseyin & Gogolin, Fabian & Lau, Marco Chi Keung & Vigne, Samuel A., 2018. "Time-variation in the relationship between white precious metals and inflation: A cross-country analysis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 56(C), pages 55-70.
    22. Fama, Eugene F. & Schwert, G. William, 1977. "Asset returns and inflation," Journal of Financial Economics, Elsevier, vol. 5(2), pages 115-146, November.
    23. Dimitrios Koutmos & Timothy King & Constantin Zopounidis, 2021. "Hedging uncertainty with cryptocurrencies: Is bitcoin your best bet?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 44(4), pages 815-837, December.
    24. Huang, Xiaoyong & Jia, Fei & Xu, Xiangyun & Yu shi,, 2019. "The threshold effect of market sentiment and inflation expectations on gold price," Resources Policy, Elsevier, vol. 62(C), pages 77-83.
    25. Bredin, Don & Conlon, Thomas & Potì, Valerio, 2015. "Does gold glitter in the long-run? Gold as a hedge and safe haven across time and investment horizon," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 320-328.
    26. Neill Fortune, J., 1987. "The inflation rate of the price of gold, expected prices and interest rates," Journal of Macroeconomics, Elsevier, vol. 9(1), pages 71-82.
    27. Salisu, Afees A. & Ndako, Umar B. & Oloko, Tirimisiyu F., 2019. "Assessing the inflation hedging of gold and palladium in OECD countries," Resources Policy, Elsevier, vol. 62(C), pages 357-377.
    28. Arnold, Stephan & Auer, Benjamin R., 2015. "What do scientists know about inflation hedging?," The North American Journal of Economics and Finance, Elsevier, vol. 34(C), pages 187-214.
    29. Kristin J. Forbes & Joseph E. Gagnon & Christopher G. Collins, 2021. "Low inflation bends the Phillips curve around the world: Extended results," Working Paper Series WP21-15, Peterson Institute for International Economics.
    30. Hansen, Bruce E., 2000. "Testing for structural change in conditional models," Journal of Econometrics, Elsevier, vol. 97(1), pages 93-115, July.
    31. Apergis, Nicholas & Cooray, Arusha & Khraief, Naceur & Apergis, Iraklis, 2019. "Do gold prices respond to real interest rates? Evidence from the Bayesian Markov Switching VECM model," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 60(C), pages 134-148.
    32. Congressional Budget Office, 2020. "Federal Net Interest Costs: A Primer," Reports 56780, Congressional Budget Office.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Su, Chi-Wei & Yang, Shengjie & Qin, Meng & Lobonţ, Oana-Ramona, 2023. "Gold vs bitcoin: Who can resist panic in the U.S.?," Resources Policy, Elsevier, vol. 85(PA).
    2. Adekoya, Oluwasegun B. & Oliyide, Johnson A. & Olubiyi, Ebenezer A. & Adedeji, Adedayo O., 2023. "The inflation-hedging performance of industrial metals in the world's most industrialized countries," Resources Policy, Elsevier, vol. 81(C).
    3. Qin, Meng & Su, Chi-Wei & Pirtea, Marilen Gabriel & Dumitrescu Peculea, Adelina, 2023. "The essential role of Russian geopolitics: A fresh perception into the gold market," Resources Policy, Elsevier, vol. 81(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Salisu, Afees A. & Ndako, Umar B. & Oloko, Tirimisiyu F., 2019. "Assessing the inflation hedging of gold and palladium in OECD countries," Resources Policy, Elsevier, vol. 62(C), pages 357-377.
    2. Adekoya, Oluwasegun B. & Oliyide, Johnson A. & Olubiyi, Ebenezer A. & Adedeji, Adedayo O., 2023. "The inflation-hedging performance of industrial metals in the world's most industrialized countries," Resources Policy, Elsevier, vol. 81(C).
    3. Hoang, Thi Hong Van & Lahiani, Amine & Heller, David, 2016. "Is gold a hedge against inflation? New evidence from a nonlinear ARDL approach," Economic Modelling, Elsevier, vol. 54(C), pages 54-66.
    4. Salisu, Afees A. & Adediran, Idris A., 2019. "Assessing the inflation hedging potential of coal and iron ore in Australia," Resources Policy, Elsevier, vol. 63(C), pages 1-1.
    5. Thomas Conlon & Brian M. Lucey & Gazi Salah Uddin, 2018. "Is gold a hedge against inflation? A wavelet time-scale perspective," Review of Quantitative Finance and Accounting, Springer, vol. 51(2), pages 317-345, August.
    6. Salisu, Afees A. & Raheem, Ibrahim D. & Ndako, Umar B., 2020. "The inflation hedging properties of gold, stocks and real estate: A comparative analysis," Resources Policy, Elsevier, vol. 66(C).
    7. Liu, Chunbo & Zhang, Xuan & Zhou, Zhiping, 2023. "Are commodity futures a hedge against inflation? A Markov-switching approach," International Review of Financial Analysis, Elsevier, vol. 86(C).
    8. Thi Hong Van Hoang & Amine Lahiani & David Heller, 2016. "Is gold a hedge against inflation? New evidence from a nonlinear ARDL approach," Post-Print hal-02012307, HAL.
    9. Lucey, Brian M. & Sharma, Susan Sunila & Vigne, Samuel A., 2017. "Gold and inflation(s) – A time-varying relationship," Economic Modelling, Elsevier, vol. 67(C), pages 88-101.
    10. Adekoya, Oluwasegun B. & Oliyide, Johnson A. & Tahir, Hammad, 2021. "What do we know about the inflation-hedging property of precious metals in Africa? The case of leading producers of the commodities," Resources Policy, Elsevier, vol. 72(C).
    11. Huang, Xiaoyong & Jia, Fei & Xu, Xiangyun & Yu shi,, 2019. "The threshold effect of market sentiment and inflation expectations on gold price," Resources Policy, Elsevier, vol. 62(C), pages 77-83.
    12. Shubhasis Dey, 2016. "Historical Events and the Gold Price," Working papers 198, Indian Institute of Management Kozhikode.
    13. Aye, Goodness C. & Chang, Tsangyao & Gupta, Rangan, 2016. "Is gold an inflation-hedge? Evidence from an interrupted Markov-switching cointegration model," Resources Policy, Elsevier, vol. 48(C), pages 77-84.
    14. O'Connor, Fergal A. & Lucey, Brian M. & Batten, Jonathan A. & Baur, Dirk G., 2015. "The financial economics of gold — A survey," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 186-205.
    15. Arnold, Stephan & Auer, Benjamin R., 2015. "What do scientists know about inflation hedging?," The North American Journal of Economics and Finance, Elsevier, vol. 34(C), pages 187-214.
    16. Bahmani-Oskooee, Mohsen & Ghodsi, Seyed Hesam & Hadzic, Muris, 2020. "Asymmetric causality between stock returns and usual hedges: An industry-level analysis," The Journal of Economic Asymmetries, Elsevier, vol. 21(C).
    17. Shahzad, Syed Jawad Hussain & Mensi, Walid & Hammoudeh, Shawkat & Sohail, Asiya & Al-Yahyaee, Khamis Hamed, 2019. "Does gold act as a hedge against different nuances of inflation? Evidence from Quantile-on-Quantile and causality-in- quantiles approaches," Resources Policy, Elsevier, vol. 62(C), pages 602-615.
    18. Salisu, Afees A. & Adediran, Idris, 2020. "Gold as a hedge against oil shocks: Evidence from new datasets for oil shocks," Resources Policy, Elsevier, vol. 66(C).
    19. Cunado, Juncal & Gil-Alana, Luis A. & Gupta, Rangan, 2019. "Persistence in trends and cycles of gold and silver prices: Evidence from historical data," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 514(C), pages 345-354.
    20. Semeyutin, Artur & Downing, Gareth, 2022. "Co-jumps in the U.S. interest rates and precious metals markets and their implications for investors," International Review of Financial Analysis, Elsevier, vol. 81(C).

    More about this item

    Keywords

    Gold price; Treasury yields; Inflation;
    All these keywords.

    JEL classification:

    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jrpoli:v:79:y:2022:i:c:s0301420722004524. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/30467 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.