Gold has often been debated as a long-term hedge against inflation. In this question, we will...

     

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Gold has often been debated as a long-term hedge against inflation. In this question, we will test whether the U.S. data support this proposition. Panel 1A shows the plot of the gold price (GPRICE) per troy ounce in US$, while Panel 1B shows the annualised US inflation rate (INF) from December 1969 to August 2021. Panel 1B: US inflation rate (%) Panel 1A: Gold price US$ 30 2,000 1,600 1,200 800 400 0 70 75 80 85 90 80 20 10 0 -10 -20 -30 95 00 05 10 15 20 70 75 80 85 90 95 00 05 10 15 20 Q10. The Engle-Granger test is performed using the U.S. logarithm of the consumer price index (LCPI) and LGPRICE. Assume that LCPI is I(1). At the 5% significance level, what can you infer about the test result? Series: LCPI LGPRICE Sample: 1969M12 2021M08 Included observations: 621 Cointegrating equation deterministics: C Automatic lags specification based on Schwarz criterion (maxlag=18) Dependent tau-statistic Prob.* Z-statistic Prob.* LCPI -1.367631 0.8103 -3.734399 0.8287 LGPRICE -1.777624 0.6415 -5.545364 0.6877 P-value>0.05. Therefore, fail to reject the null that the series are not co-integrated. There is no co-integrating relationship between LCPI and LGPRICE at the 5% level. Q11. Given your findings in Q10, is gold a long-term hedge of inflation? Explain. Gold has often been debated as a long-term hedge against inflation. In this question, we will test whether the U.S. data support this proposition. Panel 1A shows the plot of the gold price (GPRICE) per troy ounce in US$, while Panel 1B shows the annualised US inflation rate (INF) from December 1969 to August 2021. Panel 1B: US inflation rate (%) Panel 1A: Gold price US$ 30 2,000 1,600 1,200 800 400 0 70 75 80 85 90 80 20 10 0 -10 -20 -30 95 00 05 10 15 20 70 75 80 85 90 95 00 05 10 15 20 Q10. The Engle-Granger test is performed using the U.S. logarithm of the consumer price index (LCPI) and LGPRICE. Assume that LCPI is I(1). At the 5% significance level, what can you infer about the test result? Series: LCPI LGPRICE Sample: 1969M12 2021M08 Included observations: 621 Cointegrating equation deterministics: C Automatic lags specification based on Schwarz criterion (maxlag=18) Dependent tau-statistic Prob.* Z-statistic Prob.* LCPI -1.367631 0.8103 -3.734399 0.8287 LGPRICE -1.777624 0.6415 -5.545364 0.6877 P-value>0.05. Therefore, fail to reject the null that the series are not co-integrated. There is no co-integrating relationship between LCPI and LGPRICE at the 5% level. Q11. Given your findings in Q10, is gold a long-term hedge of inflation? Explain.