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When is gold an effective hedge against inflation?

Author

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  • 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
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    References listed on IDEAS

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    3. 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).
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    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

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