The Gold Price in Times of Crisis

Abstract:     
Motivated by the current gold price boom, this paper investigates whether rapidly growing investment activities have caused a new asset price bubble. Drawing on gold's role as dollar hedge, inflation hedge, portfolio diversifier and safe haven, we calculate fundamentally justified returns and approximate gold's fundamental value. Based on the deviations of the actual gold price from its fitted value, we then apply a Markov regime-switching Augmented Dickey-Fuller (ADF) test, which has substantial power for detecting explosive behavior. Our empirical evidence is favorable for a fundamentally justified price level even during the recent world financial and the current European sovereign debt crisis.

Number of Pages in PDF File: 27

Keywords: Gold Price, Speculative Bubble, Markov Regime-Switching ADF Test, World Financial Crisis, European Sovereign Debt Crisis

JEL Classification: G10, G11, G12

working papers series