The Gold Price in Times of Crisis
32 Pages Posted: 2 Dec 2010 Last revised: 3 Aug 2013
Date Written: August 2, 2013
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
Suggested Citation: Suggested Citation