A Simple Econometric Analysis Of The World Gold Price Behavior As A Hedge To The Philippine Inflation And Peso Exchange Rate During The Crisis-Terminal Period 1980-2020.
- March 21, 2022
- Posted by: rsispostadmin
- Categories: IJRISS, Social Science
International Journal of Research and Innovation in Social Science (IJRISS) | Volume VI, Issue II, February 2022 | ISSN 2454–6186
Eric J. Nasution
Adventist International Institute of Advanced Studies (AIIAS)
Abstract: Gold seems to be one of the favorite investments in the Philippines, as much as part of the international reserves of many countries. The study sought to analyze the cointegration of the world price of gold, inflation and Peso exchange rate in the Philippines. Was gold price a hedge against inflation and Peso exchange rate? The behavior of how this hedge functioned during the three sets of periods, each ended with a terminal crisis, prescribed by the US National Bureau of Economic Research or NBER, was discussed and evaluated in terms of their cointegration among the time series during the crisis-terminal period 1980-1998 (Asian financial crisis), 1980-2008 (US financial crisis), and 1980-2020 (covid-19 pandemic). The variables in the time series consist of the gold price change (GP), GDP (ppp) growth (GDP), net trade balance (NTB), inflation rate (INF), and exchange rate (ER). The Granger-causality analysis was also used to determine the function of one variable to the other within the vector autoregression or VAR model. The cointegration and Granger-causality analyses are denoted as the simple econometric analysis in this study. The first and second research questions were answered by the cointegration test of the three crisis-terminal periods of GP, GDP, NTB, INF and ER, and Granger-causality test, respectively. The study concluded that the cointegration of all variables took place during the covid-19 pandemic (1980-2020) and US financial (1980-2008) crisis-terminal periods. The vector autoregression discovered that INF Granger-caused GP, without embedding the ER in its statistics. So, gold investment does seem to be a good hedge of inflation in the Philippines.
Keywords: Crisis-terminal, hedge, gross domestic product or GDP, net trade balance or NTB, inflation rate of INF, Peso exchange rate or ER.
JEL: D40, E31, F33, O13,Q32
BACKGROUND OF THE STUDY
The question, whether gold is still imperatively necessary to keep as part of any country’s international reserve basket or not, is still haunting many policy-makers, particularly after the Bretton Woods’ fixed rate system collapsed, when President Richard Nixon from the US froze gold convertibility as part of international payments. Hinkel, A. (2021) commented in his write up that gold demand remains unbroken due to several reasons, some of which are the lower investment portfolio risk and gold price change function as a hedge. He also mentioned about the huge national debts that any country must sustain with gold as another reason, in spite of what John Maynard Keynes mentioned gold as a barbarous relic (Salter, A.W., 2020). The author of the study has added several other reasons why people might want to keep gold. He envisions that any country’s banking system must sooner or later be competitive enough to combat the disruptive innovation posed by the 4th technology revolution coming against several industries, that an innovative banking and gold bullion banking system must be developed. It is a banking system which is denominated in precious metals, including gold, rather than the fiat money or legal tender currencies. The Editors (2020) of the Harvard Business Review illustrated examples of how business is disrupted because of this innovation created by competitors; i.e. banks, steel manufacturing, travel business, and several more, are disrupted by the more innovative competitors. The uncertainty of the US economic performance with the mounting national debts and dwindling confidence of US$ as a reserve currency, has also caused the speculation of Chinese yuan to be a reserve currency.
