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Publication type: Master thesis
Title: Gold as an asset class : review of a myth with regard to inflation protection
Authors: Meier, Farida S.
Advisors / Reviewers: Brunner, Hans
Hohgardt, Holger
DOI: 10.21256/zhaw-24412
Extent: 259
Issue Date: 2021
Publisher / Ed. Institution: ZHAW Zürcher Hochschule für Angewandte Wissenschaften
Publisher / Ed. Institution: Winterthur
Language: English
Subject (DDC): 332.6: Investment
Abstract: The maintenance of purchasing power is a key concern for investors. Although inflation rates have been low in recent years, expansive monetary policy globally raises concerns of future price level increases. Indeed, inflationary tendencies have strengthened dramatically during the past months in the light of the global pandemic. Gold is repeatedly associated with inflation hedging. Yet, previous investigations of such characteristics led to contrasting findings. The time horizon seems to be a crucial factor for explaining those discrepancies. This Master’s thesis aims to provide evidence for potential characteristics in support of gold’s hedging ability and if such properties can be observed consistently across time horizons. An assessment of various holding periods should also assist investors to determine if the desired effects may be achieved within their investment horizon besides facilitating an observation of the time component. Hence, results may be more accessible and relevant to investors. The analysis further discusses country specific differences and whether results confirm hedging properties of gold against consumer price inflation. Additionally, results reproduced for silver allow to evaluate one possible alternative to gold. A review of previous research provides insights regarding the relationship of gold and the general price level. It also positions gold as an asset class by reviewing its applications in a finance and investment context. Stationarity tests of real gold returns examine one important characteristic for inflation hedging reliability in the framework investigated for the period from January 1979 to December 2020. The transformation into holding period return series allows to conclude whether holding periods affect the stationarity of returns. Country specific results indicate if the same results are applicable to US and Swiss investors. Based on the framework and data employed, real returns of gold are stationary at times, but the holding period affects this property. Regional differences also prevail, despite notable similarities, showing that it is worthwhile to investigate countries other than the USA. Additionally, a perfect inflation hedge would require a constant real return of zero which is arguably unrealistic. Although there are some indications for potential inflation hedging properties of gold, they may not be universally applicable, and several detections undermine gold’s inflation hedging ability. Hence, generalized propositions that gold can protect purchasing power may be overstated. Investors should therefore carefully validate their specific investment thesis and time horizon before using gold in their portfolio. While this thesis focuses on stationarity properties, formal investigations about return levels by future research could clarify if they prevent effective hedging. Further research about other measures of inflation, additional investment horizons and countries as well as evaluations of alternatives to gold could facilitate more substantiated investment decisions.
License (according to publishing contract): CC BY-NC-ND 4.0: Attribution - Non commercial - No derivatives 4.0 International
Departement: School of Management and Law
Appears in collections:MSc Banking and Finance

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