IS GOLD INVESTMENT AN EFFECTIVE HEDGE AGAINST INFLATION AND US DOLLAR? EVIDENCE FROM TURKEY

Abstract

Gold is regarded as "safe haven" for most investors due to its stable movement over the long run. This paper examines whether gold is an effective hedge instrument against the inflation and the currency risk of Turkish Lira against U.S. Dollar using the monthly data from February 1986 to June 2013. We in this study employ new generation Kapetanios (2005) unit root and Maki (2012) cointegration tests allowing unknown number of breaks that are determined endogenously. This method is regarded as superior to previous cointegration tests because it considers all economic crises over the long run and all developments that cause the radical changes in the economy. Our findings show that gold is indeed an effective investment tool to hedge against the risks of inflation and currency risks. We therefore conclude that it is always rational to include gold for a well-diversified portfolio.