Theories of Gold Price Movements: Common Wisdom or Myths?

Authors

Fan Fei, University of Michigan - Ann ArborFollow
Kelechi Adibe, University of Michigan Law SchoolFollow

Abstract

This paper examines several of the explanations commonly provided regarding gold and its price movements. We consider the safe haven, inflation hedge, and dollar destruction hypotheses. The results are mixed. Our data does not support the theories that gold is a safe haven or an inflation hedge. We find that gold is a zero-beta asset and there is a strong negative correlation between gold and the value of the US dollar in the post Bretton-Woods era. The decomposition of gold prices under a semi-structural model finds the aggregate demand shock, monetary policy shock, and precautionary demand shock of gold all only have modest influence on the price movement of gold.

Recommended Citation

Fei, Fan and Adibe, Kelechi (2010) "Theories of Gold Price Movements: Common Wisdom or Myths?," Undergraduate Economic Review: Vol. 6: Iss. 1, Article 5.
Available at: https://digitalcommons.iwu.edu/uer/vol6/iss1/5