Evaluation of gold investment as an inflationary hedge in case of Pakistan

In countries like pakistan,where the macroeconomic situation remains uncertain and inflationary expectations always linger to a high level,investors stay in search of such cost-effective or profitable investment opportunities that can be able to provide their capital an effective hedge against inflation. therefore,the present study aims at empirically testing the status of gold as a potential hedge against inflation. the study whirls around analysing the nature of the relationship of expected and actual inflation with gold return and its cost of carrying i.e. the interest rate. by employing an autoregressive moving average (arma) with generalised autoregressive conditional heteroscedasticity (garch) models,the time varying relationship between the variables is studied. the data sample used in the study ranges from january,2001 to december,2013. the results support gold as an effective hedge against inflation in pakistan; since,the returns on gold investment exceeds its cost of carrying with the view of changing expected inflation. another important implication of the study is that gold can also perform a considerable role with the prospect of islamic financing because it is proven to be more advantageous as compared to its alternative interest bearing investments. © pakistan institute of development economics,2015.