Are gold and silver a hedge against inflation? A two century perspective

Abstract

This study examines the long-run hedging ability of gold and silver prices against alternative measures of consumer price index for the UK and the US. We employ a dataset that spans from 1791 to 2010, and both a time-invariant and a time-varying cointegration framework. We find that gold can at least fully hedge headline, expected and core CPI in the long-run. This ability tends to be stronger when we allow for the long term dynamics to vary over time. The inflation hedging ability of gold is on average higher in the US compared to the UK. Silver does not hedge US consumer prices albeit evidence emerges in favor of a time-varying long-run relationship in the UK.

Gold and inflation(s) – A time-varying relationship

“…The Bierens and Martins (2010) test approximates the cointegrating vector in the Johansen (1991) test by a finite number of Chebyshev time polynomials and can be used to determine whether or not the cointegrating vector varies with time. We follow Bampinas and Panagiotidis (2015) in reporting results for m up to four and conclude that time-variation is observed unless at least one m fails to rejects the null hypothesis. Note: In contrary to popular tests for cointegration, the Gregory and Hansen (1996) test allows the cointegrating vector to change at a single unknown time during the period considered.…”

“…Influenced by Beckmann and Czudaj (2013), we take into account CPI rates, PPI rates and money supply. We further take the formal approach of the two earlier mentioned time-variation papers (Batten et al (2014) and Bampinas and Panagiotidis (2015)), introducing a formal test for time variation in inflation and find evidence for such variation in our data set. Table 1 displays the findings of previous papers focused on the relationship between gold and inflation, as well as the inflation rate used.…”

“…The first focuses on how inflation affects gold prices: here recent examples are the paper of Batten et al (2014) who find evidence for time-variation in the gold/inflation relationship and account gold's sensitivity to inflation to interest rate changes, or Bampinas and Panagiotidis (2015) who look at over two hundred years of data and find that gold is an inflation hedge in the long run for both the USA and the UK, Hoang et al (2016) recently offered evidence in support to the findings of Bampinas and Panagiotidis (2015), and finally, Sharma (2016) who finds evidence for the CPI to be able to predict gold returns in the UK and the USA among other countries. The second approach focuses more on how the price of gold affects inflation, such as Moore (1990) who states that gold prices are affected by the market's view of inflation, or Mahdavi and Zhou (1997) who consider gold to be a leading indicator of the inflation rate.…”

“…Building up on previous academic works, namely Batten et al (2014), Bampinas and Panagiotidis (2015), Hoang et al (2016) and Sharma (2016) we look at the link between local gold prices and local inflation from a timevarying perspective. A review of relevant academic literature suggests multiple approaches to the issue of the relationship between gold and inflation (Table 1).…”

Hedging Effectiveness of Commodities in the Stock Portfolio: Empirical Evidence from Pakistan Stock Exchange using Multivariate GARCH Models

“…These findings reconfirmed by Shahbaz et al (2014) for Pakistan and Batten, Ciner, and Lucey (2014) for United States. Recently, Bampinas and Panagiotidis (2015) examined the hedging ability of metal commodities for United States and United Kingdom using a large data set and found that gold maintains its status against increase in the general price level than silver in both economies. For hedging potentials of oil, a few authors found that hedge ratios are time varying.…”