Can gold hedge against inflation in the UAE? A nonlinear ARDL analysis in the presence of structural breaks

Nassar S Al-Nassar

doi:10.1108/prr-08-2021-0038

Abstract

Purpose The purpose of this study is to explore the role of gold as a hedge against inflation in the case of the United Arab Emirates. Design/methodology/approach The study utilizes monthly data on the local sharia-compliant spot gold contract traded on the Dubai Gold and Commodity Exchange (DGCX) and the corresponding consumer price index series over the period December 2015 to January 2021. The econometric approach employed by the study involves a unit root testing procedure that allows the timing of significant breaks to be estimated. A cointegration analysis is then conducted using a nonlinear autoregressive distributed lag (NARDL) model, taking into consideration the presence of structural breaks in addition to short- and long-run asymmetries. Findings The results reveal that consumer and gold prices are cointegrated, which implies that investing in gold can hedge against inflation in the long run. No sufficient evidence, nonetheless, is found in support of the ability of gold to serve as a hedge against inflation in the short run. Originality/value The findings have several important policy implications for policymakers and investors that are further discussed in the study.

Highlights

For thousands of years, gold has served as a major medium of exchange and store of value
The results show that gold and consumer price index (CPI) are not cointegrated, which indicates that gold is not an inflation hedge even in the long run
It is interesting to note that the ZA unit root tests suggest break points around the periods 2019M05 and 2018M05 for gold prices reflecting the upward trend in gold prices fueled by expectation of interest rates cuts by the Federal Reserve, the breakdown in trade negotiations between the US and China and the coronavirus disease 2019 (COVID-19) pandemic, while consumer prices exhibit breaks around the periods 2017M09 and 2017M12 which corresponds to the introduction of value added tax (VAT) in the United Arab Emirates (UAE) for the first time on the 1st of January 2018 and the deflationary pressure that remains evident in spite of the introduction of VAT (Ashkar et al, 2019)

Summary

Introduction

Gold has served as a major medium of exchange and store of value. This role continued until the demise of the Bretton Woods system in 1971. Gold has been traded freely on the world’s markets [1]. The price of gold increased approximately 54-fold in nominal terms from US$35 per ounce in 1970 to US$1887.60 per ounce by the end of 2020. This upward trend captured the interest of investors. This upward trend captured the interest of investors. Erb et al (2020) show that the real price of gold increased with the gold holdings of the largest two gold exchange-traded funds (ETFs), which constitute the majority of ETF investor demand [2, 3]

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Discussion

Conclusion