Is There a Speculative Bubble in the Price of Gold?
This 2011 working paper uses monthly data to examine whether rational speculative bubbles appear in the price of gold. The abstract states that:
Motivated by the current gold price boom, we investigate whether the rapidly growing investment activities have triggered a new asset price bubble. We draw on the convenience yield model and use commodity dividends to derive gold’s fundamental value. Based on the deviations of the actual gold price from its fundamental value, we apply a Markov regime-switching Augmented Dickey-Fuller test to detect ex post and identify ex ante speculative gold price bubbles. The empirical evidence is favourable for a fundamentally justified price level even during the current period of a drastically rising gold price.
The authors use the Convenience Yield of gold as a proxy for its fundamental value, following Pindyck (1993). Their new methodology allows not just for the assessment of whether a bubble appears over the time period under examination as other studies had done but can also tell us when it occurred.
Based on this methodology they find that the price of gold over the period under examination is fundamentally justified, no bubbles are found.
Method: Markov Regime-Switching ADF test for the presence of rational speculative bubbles.
Data: Daily COMEX data for futures and spot prices of gold from November 1978 to March 2010. 3 Month t-bill November 1978 to March 2010 Monthly US CPI
Full Citation: Bialkowski, J. P., Bohl, M. T., Stephan, P. M. and Wisniewski, T. P. (2011). Is there a speculative bubble in the price of gold? SSRN Working Paper. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1718106