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Extracting gold risk premium via dimension reduction tools: implication on the gold–inflation relationship

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  • Tai-Yong Roh
  • Byung Yoon Lee
  • Yahua Xu

Abstract

We forecast future gold returns with a long sample starting from 1980, using various dimension reduction tools. We demonstrate that the models based on dimension reduction tools can generate sizable fit (approximately 20% of in-sample R2) and strong out-of-sample performance (approximately 15% of out-of-sample R2). By utilizing the extracted gold risk premiums, we test the gold–inflation relationship on an ex-ante basis. We find a strong positive relationship between the expected inflation and the gold risk premium when forecasting with feature extraction methods (PLS, PCA, scaled-PCA, target-PCA).

Suggested Citation

  • Tai-Yong Roh & Byung Yoon Lee & Yahua Xu, 2026. "Extracting gold risk premium via dimension reduction tools: implication on the gold–inflation relationship," Applied Economics Letters, Taylor & Francis Journals, vol. 33(2), pages 155-164, January.
    • Handle: RePEc:taf:apeclt:v:33:y:2026:i:2:p:155-164
    DOI: 10.1080/13504851.2024.2364002
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