Is Gold a Hedge Against Inflation? A Wavelet Time-Frequency Perspective
Posted: Mon Oct 12, 2015 12:47 pm
[quote=http://papers.ssrn.com/sol3/papers.cfm? ... id=2670896]Gold is frequently proposed as a means to hedge against the risk of future price in?ation, but empirical, cross-country evidence for this is limited. In this study, we examine the capacity of gold to act as a hedge for in?ation in the United States, United Kingdom, Japan and Switzerland. While previous studies have failed to incorporate the dynamic hedging properties of gold for in?ation, or shown that gold only acted as an in?ation hedge during a limited historical cohort, we adopt a methodology suitable to identify localized phases of comovement. Speci?cally, the continuous wavelet transformation allows the simultaneous characterization of short- and long-term hedging properties at every point in calendar time.
Empirical ?ndings indicate that gold acts as a short- and long-run hedge for realized in?ation at a variety of points in calendar time. Moreover, these results are found to hold for each economy considered. Gold is found to act as a long-run hedge against realized in?ation from the 1970s up to the mid 1980s. Beyond this time, gold acts as a hedge against in?ation at distinct points in time, suggesting that the hedging properties of gold are not limited to a single historical cohort as reported in previous studies.
Next, the capacity of gold to act as a hedge for unexpected in?ation is considered. In order to calculate unexpected in?ation, expected in?ation is ?rst imputed using survey based data and time series models. For the US, evidence for comovement between gold and unexpected in?ation is strong, with gold found to act as a short and long-term hedge. In contrast, whilst comovement between gold and unexpected in?ation is evident for other economies, 25this comovement is not always in the expected direction. In particular, episodes of negative comovement are evident for the UK and Japan. An extended long-run episode is observed for the latter during the so-call “lost decade”, indicating that gold acts as a hedge against negative unexpected in?ation at this juncture.
Finally, we determine the capacity of gold futures and gold stocks to hedge against realized in?ation. For the former, hedging performance is in-line with physical gold. Gold stocks are also found to frequently act as a hedge against in?ation.
The results outlined provide strong support for the capacity of gold to hedge against realized in?ation for all countries examined. Moreover, hedging ability is evident at long-and short-horizons. Gold is further found to hedge against unexpected in?ation in the US and to comove with unexpected in?ation for other economies. In light of previous ?ndings highlighting the safe haven properties of gold, our results further reinforce the lure of gold as an investment asset.
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Empirical ?ndings indicate that gold acts as a short- and long-run hedge for realized in?ation at a variety of points in calendar time. Moreover, these results are found to hold for each economy considered. Gold is found to act as a long-run hedge against realized in?ation from the 1970s up to the mid 1980s. Beyond this time, gold acts as a hedge against in?ation at distinct points in time, suggesting that the hedging properties of gold are not limited to a single historical cohort as reported in previous studies.
Next, the capacity of gold to act as a hedge for unexpected in?ation is considered. In order to calculate unexpected in?ation, expected in?ation is ?rst imputed using survey based data and time series models. For the US, evidence for comovement between gold and unexpected in?ation is strong, with gold found to act as a short and long-term hedge. In contrast, whilst comovement between gold and unexpected in?ation is evident for other economies, 25this comovement is not always in the expected direction. In particular, episodes of negative comovement are evident for the UK and Japan. An extended long-run episode is observed for the latter during the so-call “lost decade”, indicating that gold acts as a hedge against negative unexpected in?ation at this juncture.
Finally, we determine the capacity of gold futures and gold stocks to hedge against realized in?ation. For the former, hedging performance is in-line with physical gold. Gold stocks are also found to frequently act as a hedge against in?ation.
The results outlined provide strong support for the capacity of gold to hedge against realized in?ation for all countries examined. Moreover, hedging ability is evident at long-and short-horizons. Gold is further found to hedge against unexpected in?ation in the US and to comove with unexpected in?ation for other economies. In light of previous ?ndings highlighting the safe haven properties of gold, our results further reinforce the lure of gold as an investment asset.
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