Market risk, inflation, and the gold price

By Manqoba Madinane

We believe the US government's actions to curb financial market systemic risks are necessary - but sadly insufficient to counteract the destabilizing effect of the credit market meltdown.
We provide quantitative evidence of gold's role as a safe-haven in periods of financial market distress. We believe that, should systemic risk keep rising as rapidly, the gold price will stop slipping.
Causality tests show that the causal relationship between the gold price and the trade-weighted US dollar undeniably runs from the greenback into gold price movements. After controlling for movements in the US dollar, statistical tests also show that market risk aversion Granger-causes gold prices. However, we infer no casual relationship between inflation (or inflation expectations) and the gold price after controlling for market risk and movements in the US dollar.
Statistically, the economic significance of our results is that gold is not an inflation-hedge asset. This supports the co-existence of falling global inflation expectations with rising gold prices.