Do bubbles occur in the gold price? An investigation of gold lease rates. 2013.
This 2013 paper offers the first examination of whether bubbles occur in the gold price using the only cashflow that can be earned from gold, gold lease rates, as it’s fundamental determinant of value. The paper tests whether 2 classes of bubbles occur – Rational speculative bubbles and Periodically bursting bubbles.
Both sets of tests point to the existence of periods where a bubble was present in the gold price, especially when variants of the bubbles tests that have been shown to be more powerful are utilised. Bubbles are shown to be frequent, if short lived, with only the mid 00’s lacking a bubble period for a few consecutive years.
A criticism of the use of lease rates as a fundamental determinant of golds value is available here on the blog.
Methodology: Markov-switching ADF tests
Data: Daily Am and PM Fixings and Gold lease Rates from 17th of July 1989 up to the 31st of July 2013
Abstract: We assess whether two classes of bubbles occur in the spot price of gold, rational speculative and periodically bursting bubbles, using gold’s lease rates for the first time in the literature as a measure of its fundamental value. This question is of particular significance as these are the only observable market measures of a yield that can be earned from gold. We use unit root and cointegration tests to look for rational speculative bubbles and Markov Switching Augmented Dickey-Fuller tests for periodically bursting bubbles. ADF and cointegration tests point to a rational speculative bubble. The more theoretically valid Markov Switching ADF test gives mixed evidence. No bubble is found to be present if we allow the variance to switch between regimes, the gold and its lease rate relationship is instead characterised by high and low variance periods. Imposing a constant variance gives evidence of a bubble for the 2, 3 and 12 month lease rates, but no bubble when we use the 1 and 6 month rates as determinants