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

By Andrew C. Worthington, M. Pahlavani. 2007

253 citations recorded by the source corpus.

This note tests for the presence of a stable long-run relationship between the price of gold and inflation in the United States from 1945 to 2006 and from 1973 to 2006. Since both the gold market and the inflationary regime have been subjected 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 breaks into account, a modified cointegration approach provides strong evidence of a cointegrating relationship between gold and inflation in 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.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/5b8a52781e72106ee68654c9f67f2bd2577b27c6

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In Economics and Econometrics

Citations in the corpus

Are gold and silver a hedge against inflation? A two century perspective (2015, background): “…and Zhou (1997) and Tully and Lucey (2007) have documented an insignificant LR relationship between gold price and CPI, while Gosh et al. (2004) and Worthington and Pahlavani (2007) assert a significant positive relationship in the US.3 On the other hand, the empirical literature for the hedging…”
What precious metals act as safe havens, and when? Some US evidence (2015, unknown): “In addition to gold, gold alternatives such as gold stocks and gold derivatives have also been examined as hedge and safe haven by Jaffe (1989), Worthington and Pahlavani (2007), Pullen et al. (2011), etc.”
Volatility spillovers and cross-hedging between gold, oil and equities: Evidence from the Gulf Cooperation Council countries (2017, unknown): “In fact, in the presence of structural breaks, the role of gold as an inflation hedge appears more significant (Worthington and Pahlavani, 2007).”
Return and volatility transmission between gold and stock sectors: Application of portfolio management and hedging effectiveness (2014, background): “…ingoldbullionbecause it iseasily transportableand measurable and provides a hedge against inflation, political uncertainty, slow economic growth, and exchange rate movements (Capie, Mills, & Wood, 2005; Ghosh, Levin, Macmillan, & Wright, 2004; Mahdavi & Zhou, 1997; Worthington & Pahlavani, 2007).”
Gold as an Infl ation Hedge in a Time-Varying Coefficient Framework (2012, methodology): “It is worth mentioning that studies which focus on ’safe haven’ aspects mostly adopt daily instead of monthly data.”
The Financial Economics of Gold – A Survey (2015, background): “This seems to point to the finding of cointegration in Worthington and Pahlavani (2007) as stemming from that year.”