Is gold investment a hedge against inflation in Pakistan? A co-integration and causality analysis in the presence of structural breaks

• Published in: The North American journal of economics and finance 2014-04, Vol.28, p.190-205
• Main Authors: Shahbaz, Muhammad, Tahir, Mohammad Iqbal, Ali, Imran, Rehman, Ijaz Ur
• Format: Article
• Language: English
• Subjects: Commodity prices; Economic growth; Gold; Gold markets; Gold prices; Hedging; Inflation; Investment policy; Pakistan; Studies
• ISSN: 1062-9408; 1879-0860
• DOI: 10.1016/j.najef.2014.03.012

•The current study investigates the use of investment in gold is a hedge against inflation for the case of Pakistan.•The study has applied the ARDL bounds testing approach to co-integration for the long run, and innovative accounting approach (IAA) to examine the direction of causality in variables.•Findings reveal that “investment in gold is a good hedge against inflation” not only in the long-run but also in the short-run. The last few years have witnessed overwhelming investments in the gold market. Numerous studies have discussed how investment in gold is a hedge against inflation. The current study investigates whether a gold investment is a hedge against inflation in case of Pakistan. In doing so, we have used time series data on gold prices; economic growth and inflation are used for the period of 1997Q1–2011Q4. The study has applied the ARDL bounds testing approach to co-integration for the long run, and innovative accounting approach (IAA) to examine the direction of causality in variables. Our findings reveal that “investment in gold is a good hedge against inflation” not only in the long-run but also in the short-run. The implications and applications of the study are discussed in detail.