Bank- en Financiewezen vol:78 issue:2 pages:167-174
Over the course of the last decade, the price of gold has exploded. Recently, however, prices started to fall again. The reversal of this trend has spurred a heated debate between proponents and opponents of gold as an investment. Using time series analysis, we further examine the role of gold to comment on the ongoing debate. From our univariate analysis we find the gold market to be weak form efficient, which proves the ineffectiveness of technical analysis as an investment technique on the monthly gold market. To investigate the relationship of gold with respect to inflation, following economic intuition and central arguments of gold bugs, we perform a multivariate time series analysis. Using Johansen and Engle-Granger cointegration tests we find the assumed relationship between gold and inflation to be much weaker than expected. Additionally, a paradigm shift seemed to have occurred after the start of the recent economic crisis. Also, we find no proof of Granger causality between the price of gold and inflation. Together, this evidence justifies the increasing critique on gold as an investment and points towards the ongoing price correction as the start of the bursting of a gold bubble.