Gold as an Inflation Hedge: a Study on United States
GOLD AS AN INFLATION HEDGE: A STUDY ON UNITED STATES
1. Introduction Inflation hedge can be defined as an investment designed to protect against inflation risk where such an investment 's value will typically increase with inflation. There are many ways of investment to hedge against inflation and one of them is by taking gold as an inflation hedge. Gold is a type of commodities that is used for investment. Commodities are said to be the best way to hedge against inflation which reduce the returns of purely financial assets like stocks and bonds because commodities are physical assets, but unlike most commodities, gold is durable, relatively transportable, universally acceptable and easily authenticated.( Worthington, A.C., and Pahlavani, M.,2006). However, gold is also a high-risk and highly volatile investment. Unlike common stock, bonds, and real estate, the value of gold does not reflect underlying earnings. Gold is a purely speculative investment. Over the next few years, it may fall to $500 an ounce or rise to $2,000 an ounce. There is no way to know which it will be. (Feldstein, M., 2009)
Therefore, by using the yearly average inflation rate and the yearly average gold price in United States from 1968 to 2009, the purpose of this study is to find out gold act as an inflation hedge and how strong the inflation rate and the period of time influence the gold prices where we can know whether the gold is a short-run or a long-run inflation hedge.
2.0 Problem Statement
There is an argument that the price of gold has actually only exceeded the inflation hedge price on a small number of occasions - 1875-1879, 1884-1889,1892-1899,1974-1975,1977-1991 and 2006. (Worthington, A.C., and Pahlavani, M., 2006)
Therefore, the problem is whether the gold can be used to hedge against inflation in the long-run or in the short-run.
3.0 Objectives • To find how gold act as an inflation hedge.
• To predict the future value of the gold price from the
1. Introduction Inflation hedge can be defined as an investment designed to protect against inflation risk where such an investment 's value will typically increase with inflation. There are many ways of investment to hedge against inflation and one of them is by taking gold as an inflation hedge. Gold is a type of commodities that is used for investment. Commodities are said to be the best way to hedge against inflation which reduce the returns of purely financial assets like stocks and bonds because commodities are physical assets, but unlike most commodities, gold is durable, relatively transportable, universally acceptable and easily authenticated.( Worthington, A.C., and Pahlavani, M.,2006). However, gold is also a high-risk and highly volatile investment. Unlike common stock, bonds, and real estate, the value of gold does not reflect underlying earnings. Gold is a purely speculative investment. Over the next few years, it may fall to $500 an ounce or rise to $2,000 an ounce. There is no way to know which it will be. (Feldstein, M., 2009)
Therefore, by using the yearly average inflation rate and the yearly average gold price in United States from 1968 to 2009, the purpose of this study is to find out gold act as an inflation hedge and how strong the inflation rate and the period of time influence the gold prices where we can know whether the gold is a short-run or a long-run inflation hedge.
2.0 Problem Statement
There is an argument that the price of gold has actually only exceeded the inflation hedge price on a small number of occasions - 1875-1879, 1884-1889,1892-1899,1974-1975,1977-1991 and 2006. (Worthington, A.C., and Pahlavani, M., 2006)
Therefore, the problem is whether the gold can be used to hedge against inflation in the long-run or in the short-run.
3.0 Objectives • To find how gold act as an inflation hedge.
• To predict the future value of the gold price from the
References: 1. Feldstein, M.,Is Gold a Good Hedge? December 2009. 2. Gujarati, D.N., and Porter, D.C., Basic Econometrics, McGraw. Hill International Edition, 2009. 3. Ghosh, D., Levin, E.J., Macmillan, P., Wright , R.E., Gold as an Inflation Hedge? Institute for the Study of Labour, University of Bonn, Germany, December 2000. 4. Levin, E.J., Wright , R.E., Short-run and Long-run Determinants of the Price of Gold, World Gold Council, Research Study No.32, June 2006. 5. Worthington, A.C., and Pahlavani, M., Gold investment as an inflationary hedge: Cointegration evidence with allowance for endogeneous structural breaks, Accounting & Finance Working Paper 06/04, School of Accounting & Finance, University of Wollongong, 2006. http://ro.uow.edu.au/accfinwp/20. 6. Garner, C.A., How useful are leading indicators of inflation?.Federal Reserve Bank Of Kansas City. (X BEST) 7. Cecchetti, S.G., Chu, R.S and Steindel, C., The Unreliability Of Inflation Indicators, Current Issues In Economics And Finance, Federal Reserves Bank Of New York, Volume 6 Number 4, April 2000.(X BEST) http://www.usinflationcalculator.com/inflation/historical-inflation-rates/ http://www.kitco.com/scripts/hist_charts/yearly_graphs.plx