The Relationship Between Inflation and Gold Price: Evidence From Sri Lanka

Abstract

Gold is most sacred metal among Sri Lankans due to it security and high demand. Gold is treated as an alternative investment avenue. It is often stated that gold is the best preserving purchasing power in the long run. Gold investment can also be used as a hedge against inflation and currency depreciation. Therefore, investors are showing interest in investing in the gold due to economic vulnerability. From an economic and financial point of view, movements in the price of gold are both interesting and important. It cannot be denied that gold price is stable all the time and has minimal fluctuation for economic volatility and financial condition. The price of gold is affected by various factors like inflation, crude oil, exchange rate etc. But gold prices are fluctuated by inflation significantly. Gold prices control the inflation instability. Therefore, deep understanding of the relationship between inflation and gold price is prerequisite. The ultimate objective of the study is to explore the relationship between inflation and gold price. The dependent variable is gold price which is measured by Sri Lanka rupee per Troy ounce meanwhile the independent variable is inflation which is measured by wholesale price index. 240 monthly observations from January 1999 to December 2018 were used in the study. Unit root test, correlation analysis, ordinary least square regression analysis, granger causality test and normality tests are employed for analysing data. The empirical results have found strong and positive correlation between inflation and gold price. The results of regression analysis revealed that inflation significantly impacts on gold price. Unidirectional relationship was found between gold price and inflation.