In the long run, gold has proven to be a reliable hedge against inflation. However, according to research from the top business school in the US, gold price performance in the short term is not that stable, but that doesn’t mean it has no value as an investment asset. cryptocoin.com We are giving the details as…
Wharton Professor shares his gold report
In September, Urban Jermann, Wharton professor of finance and economics, published an article outlining the extra value of gold as jewellery, beyond its true value. In the Jermann research paper, “The model implies that on average, more than half of gold’s value comes from its role as an investment asset. The model allows us to view gold as bonds where interest rates matter. But this is not just a simple bond. “This is an option bond,” he said.
Jermann’s research on the investment value of gold comes as expectations arose that the US Federal Reserve will raise interest rates to combat rising inflationary pressures. Markets are pricing in aggressive monetary policy as inflation sees an unprecedented rise. Consumer prices rose 7.5 percent year-on-year last week. Jermann’s modeling states that gold’s link to interest rates is why it is not a great short-term hedge against inflation. He said that the relationship of gold with interest rates has been strong for the last 15 years.
Gold prices may see 20% correction
Jermann said gold could struggle in the current environment; however, there is a natural base in price. In the Jermann report, “Gold is attractive as a store of value at low and negative real interest rates. When interest rates rise again, the price of gold falls again. But that’s not the whole story,” he said, adding:
What my model captures is that if interest rates rise, gold prices will fall, but at some point the decline will end. At some point, people who love jewelry will buy gold. They basically give you some insurance as an investor. As interest rates rise, gold prices respond less to them because gold becomes less of an investment asset and more of a consumer good.
As to how low gold prices could fall, Jermann said the market could see a 20 percent correction as the Federal Reserve tries to raise interest rates. While tensions between the US and Russia remain high, tackling the effects of the upcoming cycle of rate hikes is also seen as a new safe-haven demand.
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