Can Gold Hedge Stock Market and Inflation Simultaneously?

Abstract

The hedging property of gold against single asset has been greatly demonstrated in literature. Gold-stock hedge suggests gold as ‘safe haven’ for stock market. Unlike gold-stock hedge which requires zero or negative correlation between their returns, gold-inflation hedge refers to the positive co-movement or ’peg’ between gold return and inflation. Thus, this is the first paper to address whether gold can hedge stock market and inflation simultaneously since stock market boom often comes with moderate inflation which creates puzzle in gold price dynamics and its hedging property. In this paper, we assume that an investor creates optimal portfolios from stock and gold. The weights assigned to gold are interpreted as hedge coefficient towards the stock market. We ask if the hedge coefficient also moves in tandem with inflation or other functions of inflation. When regressing the hedge coefficient on inflation or functions of inflation, the slope will be positive if the gold first used to hedge the stock market can also hedge inflation. We find that is not the case: the coefficient is not positive in statistics. This result implies that gold fails to hedge both stock market and inflation simultaneously over time.