The Gold Price in Times of Crisis

Abstract

Motivated by the recent 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, approximate gold's fundamental value, and apply a Markov regime-switching Augmented Dickey-Fuller (ADF) test which has substantial power for detecting explosive behavior. Although our results are sensitive to the specification of the fundamental value, we show that a model accounting for the current European sovereign debt crisis accurately tracks the gold price observed in the market.

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

JEL Classification: G10, G11, G12