Evaluating the timeless appeal: gold and silver as inflation hedges

Abstract

Gold and Silver were in the forefront of monetary policy for a significant part of human history and are now regarded as financial assets with inflation-hedging properties. This thesis seeks to evaluate whether this belief is true in the long-run, by examining their prices during 1792–2022 in the US and the UK, against expected and headline inflation. First, an analysis of inflation-adjusted prices finds that gold has retained and slightly increased its purchasing power. The same is not true for silver which has relied on sporadic peaks and high-momentum markets. Also, other options might be better since both metals are volatile. Second, a VECM is employed, finding that gold is cointegrated with inflation and has been a superior hedge against it, better so for the US and slightly better against expected inflation. Silver is also a hedge, though less consistent and only against expected inflation.