Gold, Hedges and Correlations

Today I'm going to touch on a sort of theme I have here and that's regarding on how to assess correlated data. How much can we actually read into it? How do we determine that there's a fundamental relationship that, not only holds well in the past but will continue to do so in the future?

To do that I'll be taking a quick look at gold and why I consider the "inflation hedge myth". In short, gold is not an inflation hedge. At least not on any reasonable time scale.

Currency and Price Stability

There are two related claims made by gold standard advocates. These claims are:


1) Under a gold standard, prices are stable.
2) Prices ought to remain stable.

I) We'll start by looking at the first claim. What does it mean to say that prices are stable?

Modeling Gold Returns: A Case Study

In my previous post, I considered the problem of induction. Looking at emeralds and noting that they are green (or grue) is supposed to be a simple example since making color judgements is presumably a simple task. The example could be further complicated if we factor in the vagueness of making color judgements. After all, it's likely the case that the distribution of electromagnetic frequencies differ between one emerald and the next. (And they would differ further depending on the distribution of EM frequencies of the "white light" used upon it.)

In most real world scientific inquiries, these uncertainties are present and need to be dealt with. So instead of focusing on the sorts of examples used in "simple" philosophical thought experiments, I thought I would provide a more detailed example.

The motivation for looking at this came from an interesting paper entitled The Golden Dilemma. I will make frequent reference to Exhibits from this paper. [1]