Gold as a Hedge for Inflation: An Event-Study of Abnormal Inflationary Periods in the Past Five Decades

Abstract

Historically gold and inflation have had a weak positive correlation; therefore, gold has been considered an inflationary hedge and a “safe haven” in times of high inflation for investors. An event-study of five periods with deviant inflation in the past five decades were examined in this study to determine the abnormal return (AR) of gold in comparison to the U.S. stock market (S&P 500). These findings concluded a deviation in market perception regarding the inflationary hedge that gold has historically adhered to have. Specifically, the recent Russia-Ukraine conflict caused a large shift in investors' sentiment of investing into gold as a hedge, as the event window concluded significant negative abnormal returns. Simultaneously the U.S. experienced economic factors that would historically have caused gold prices to increase, yet the opposite occurred. Although the Ukraine conflict's final outcome is still unknown, early stage-data shows how gold could potentially not be considered a “safe haven” or an inflationary hedge today, given many dynamic factors ruling the world.