Problem 3.19

The following table gives data on gold price, the Consumer Price Index (CPI) , and the New Yorl Stock Exchange (NYSE) Index for the United States for the period 1977-1991. The NYSE Index includes most of the stocks listed on the NYSE, some 1500 plus.
 

Download:  0319.dat ,  0319.xls

Year
Price of gold at New York, $ per troy ounce
CPI 1982-84 = 100
NYSE Dec, 31, 1965 = 100
1977
147.98
60.6
53.69
1978
193.44
65.2
53.70
1979
307.62
72.6
58.32
1980
612.51
82.4
69.10
1981
459.61
90.9
74.02
1982
376.01
96.5
68.93
1983
423.83
99.6
92.63
1984
360.29
103.9
92.46
1985
317.30
107.6
108.90
1986
367.87
109.6
136.00
1987
446.50
113.6
161.70
1988
436.93
118.3
149.91
1989
381.28
124.0
180.02
1990
384.08
130.7
183.46
1991
36.024
136.2
206.33

(a)  plot in the same scattergram gold prices, CPI, and the NYSE Index. (Eviews)

(b) An investment is supposed to be a hedge against inflation if its price and or rate of return
      at least keeps pace with inflation. Assuming:
      GOLD = b1 + b2 CPI + u1 ;
      NYSE = b1 + b2 CPI + u2
      If the hypothesis is correct, what value of  b2 would you expect? (Suggested Answer)

(c)  Which is a better hedge against inflation, gold or the stock market? (Eviews)
 
 

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