“Gold is a way of going long on fear, and it has been a pretty good way of going long on fear from time to time. But you really have to hope people become more afraid in a year or 2 years than they are now. And if they become more afraid you make money, if they become less afraid you lose money, but the gold itself doesn’t produce anything.” Warren Buffett (Slome 2011)
Abstract
Gold, whether held in physical form or through financial claims, is of utmost importance to investors, central bankers, and sovereign nations alike. Yet empirically validated explanations of its volatile price remain elusive. Without an ex-post understanding of the determinants of gold prices, ex-ante forecasting is a fruitless endeavor. In this research, an index of US and European economic policy uncertainty is incorporated into a short-run pricing model for gold. The results suggest that in addition to gold being a hedge against inflation, increases in economic policy uncertainty contribute to increases in the price of gold.
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Notes
Total amount of gold mined, as assessed at the end of 2008.
First differencing or using percentage change are methods to help alleviate concerns of serial correlation. Post-regression Durbin Watson tests produce test statistics between 1.82 and 2.13, centered around and close to the 2.0 value corresponding to no serial correlation.
A linear estimation was used to impute missing values of GDP.
In the less parsimonious international regression, variance inflation factors raise a small concern about multicolinearity between πworld and other variables, VIF ≈3.9. However, as this is not our main variable of interest and the VIF is less than the rule of thumb, 5 or 10 depending on whose rule you follow, we continue to include the variable and regression in our results.
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Acknowledgments
We wish to thank Cetin Ciner and an anonymous reviewer for their extremely helpful comments in the development of this manuscript. We further recognize and thank the Cameron School of Business at UNCW for receipt of a Summer Research Grant to support this project.
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Jones, A.T., Sackley, W.H. An uncertain suggestion for gold-pricing models: the effect of economic policy uncertainty on gold prices. J Econ Finan 40, 367–379 (2016). https://doi.org/10.1007/s12197-014-9313-3
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DOI: https://doi.org/10.1007/s12197-014-9313-3