Can Gold Provide a Hedge against Inflation and Exchange Rate Movements in Ghana?

and Mani (2005), a liquid asset is an asset which can be converted into cash and gold is considered a liquid asset because it can be sold in terms of commodity at the exchange market and can be converted into cash. Among the various precious stones, gold is promoted mostly as an investment and is viewed as the most effective metal with hedging and safe haven properties across various countries. Investors buy gold for reasons such as hedge against inflation and currency crises that may arise in the future. Studies has shown that, higher inflation results in higher interest rate which leads to increase in the exchange rate. Moreover, research has proved that as gold increases, inflation increases and as such exchange rate also increases. Gold has historically been an excellent hedge against inflation because its price tends to rise when the cost living increases. Over the past fifty years, investors have seen gold prices soar and stock market plunge during high inflation years (DALTORIOS, 2008). Gold may be an inflation hedge in the long-run but it is also characterized by significant price short-run volatility moving independently of paper investments’ (Aggarwal, Abstract: In this work, we examined whether gold can provide a safe haven against inflation and exchange rate movement in Ghana using data spanning 1990-2012. We employed the regression model. Our findings reveal that, gold serves as both a perfect and imperfect hedge against inflation. For exchange rate, the findings suggest that gold is able to perfectly hedge against any exchange rate movement. This shows that in the event of any inflation or currency depreciation, gold investors tend to benefit more because gold hedges them against these risks. The study also discusses some policy implications which encourages investors to invest more in gold as it is able to serve as a hedge against inflation and exchange rate movement when held for a long period of time. Same cannot be said for gold hedging against inflation and exchange rate movement. changes in exchange rate. ᶑ (cid:2870) , the co-efficient of inflation shows the elasticity of gold returns with respect to inflation. It measures the responsiveness of gold prices to changes in the general price level. ᶑ (cid:2871) , : The co-efficient of financial crises shows the elasticity of gold returns with respect with financial crises. It measures the responsiveness of gold prices to changes in the financial market ᶑ (cid:2872) . The co-efficient of trade openness shows the elasticity of gold returns with respect to trade openness. It measures the responsiveness of gold prices to changes in the trade openness. ᶑ (cid:2873) . The co efficient of Economic growth represents the elasticity of gold returns with respect to Economic growth. It measures the responsiveness of gold prices to changes in Economic Growth. If the coefficient it gold it to co-efficient of if gold financial gold returns ᶑ In the same way, if trade openness shows a positive impact on gold returns then ᶑ 0. Lastly, if the co-efficient ᶑ is > 0, then it affects gold returns is negative. Therefore, if economic growth a positive impact on gold returns then, ( ᶑ (cid:2873) ) is > 0