Can gold hedge against inflation in the UAE? A nonlinear ARDL analysis in the presence of structural breaks

Abstract

Purpose – The purpose of this study is to explore the role of gold as a hedge against inflation in the case of the United Arab Emirates. Design/methodology/approach – The study utilizes monthly data on the local sharia-compliant spot gold contract traded on the Dubai Gold and Commodity Exchange (DGCX) and the corresponding consumer price index series over the period December 2015 to January 2021. The econometric approach employed by the study involves a unit root testing procedure that allows the timing of significant breaks to be estimated. A cointegration analysis is then conducted using a nonlinear autoregressive distributed lag (NARDL) model, taking into consideration the presence of structural breaks in addition to short- and long-run asymmetries. Findings – The results reveal that consumer and gold prices are cointegrated, which implies that investing in gold can hedge against inflation in the long run. No sufficient evidence, nonetheless, is found in support of the ability of gold to serve as a hedge against inflation in the short run. Originality/value – The findings have several important policy implications for policymakers and investors that are further discussed in the study.

Keywords

• Gold
• Inflation
• Hedging
• Nonlinear autoregressive distributed lag (NARDL) model
• United Arab Emirates (UAE)