On SAGE Insight: Investigating Gold Investment as an Inflationary Hedge

From Business Perspectives and Research

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Inflation is a necessary ailment for investors and governments all over the globe. The risk of getting lower real return than expected is called purchasing power risk or inflation risk. Purchasing power risk erodes the buying or purchasing power of money and the value of the real return on an investment. Thus, investors, portfolio managers, and governments intend to manage and hedge against purchasing power risk. World Gold Council Report (2017) indicates that for a 1 percent increase in inflation, gold demand increases by 2.6 percent. This reflects that gold may be used as a hedging tool against purchasing power risk.

Gold has become a universal phenomenon across consumers of all income levels. It is not only rich but also the poor’s choice for investment. That is the prime reason why gold attracts only 3 percent GST. Gold is the most popular investment avenue because of its ability to provide liquidity. In the present digital era, we have another avenue like paper gold for making gold investment, namely exchange-traded funds (ETFs), sovereign gold bonds, gold mutual funds, and e-gold. Given the demand and usage of gold, and the need to hedge against inflation, this article intends to analytically investigate gold as an investment tool to hedge against inflation.

Abstract

Gold and Indian culture have been sharing an age-old association. India is one of the top two consumers of gold. Gold is the most popular investment avenue grown by 1,588 percent over the whole period from 1979 to 2017 (June). In this article, we intend to investigate gold as an investment to hedge against inflation. The sample period because of its ability to provide liquidity. The average monthly price however has to study the relationship between gold and inflation is 2011–2017 (March). To analyze long-run equilibrium between gold and inflation (consumer price index [CPI]), Johansen’s cointegration approach has been used. The short- and long-run causality between gold and inflation has been studied using vector error correction model (VECM) and Wald test. The results of cointegration indicate that gold and CPI series are cointegrated and bear long-run equilibrium. Both VECM and Wald test results indicate that there is only long-run causality between CPI and gold prices. However, in short run these variables do not show any causality. Thus, we infer that gold investment can be used as hedge against Inflation. The findings of this research have got direct implications for retail investors, portfolio managers, treasury and fund managers, government, and commercial traders.

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Article details
Investigating Gold Investment as an Inflationary Hedge
Narinder Pal Singh, Navneet Joshi
First Published October 25, 2018 Research Article
DOI: 10.1177/2278533718800178
From Business Perspectives and Research

     
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