The Golden Variable?

Abstract

New econometrics produce a jaundiced view of the golden constant, which lauds gold as an inflation hedge. Price-level-based valuation errors correct at a snail’s pace, if at all. But this study shows that lagged errors affect the variance rather than the mean of gold returns, as overvaluation corresponds with considerably wider conditional distributions. Also, gold’s hedging value is mixed even over centuries, given data as far back as 1257 A.D. The price elasticity of gold to inflation does increase over longer horizons. But prevailing misvaluations are even less likely to resolve over the extended haul. In addition, the correlation between gold and TIPS-based estimated inflation expectations and premiums is highly volatile and perversely positive through the 2010s, more consistent with a golden variable, if not an antithesis of inflation protection amid unconventional monetary policy.

TOPICS: Other real assets, currency

Key Findings

• • Econometrics produce a jaundiced view of the “golden constant,” which lauds gold as an inflation hedge. Valuation errors based on price-level benchmarks correct at a snail’s pace, if at all since the mid-1970s in the US, and lagged errors affect the variance more than the mean of gold returns, as overvaluation corresponds with wider conditional distributions and therefore uncertainty.

• • Also, gold’s hedging value is mixed even over centuries, given data as far back as 1257 A.D. The price elasticity of gold to inflation does increase over longer horizons. However, prevailing misvaluations are even less likely to resolve over the extended haul.

• • In addition, the correlation between gold and TIPS-based estimated inflation expectations and premiums is highly volatile and perversely positive through the 2010s, more consistent with a “golden variable,” if not an antithesis of inflation protection amid unconventional monetary policy measures. These results also cast doubts regarding any relation between real yields and the asset, insofar as TIPS and gold are not substitutes.