Gold and inflation: Expected inflation effect or carrying cost effect?

This study examines whether the expected inflation effect hypothesis adequately explains the causal relationship between inflation expectations and gold returns. A bootstrap full‐sample Granger causality test shows that gold returns cause inflation expectations rather than the reverse. To account for possible structural changes, we apply bootstrap subsample Granger causality tests with 60‐month windows. The results suggest that both professional forecasters' and consumers' inflation expectations have negative effects on gold returns in some but not all sample periods, contradicting the expected inflation effect hypothesis. No causality is found in other periods, consistent with the carrying cost hypothesis that the expected gain from gold due to higher inflation is offset by its carrying cost. Holding gold will not necessarily hedge against inflation because gold returns do not necessarily correlate with inflation expectation. Therefore, the carrying cost hypothesis more accurately explains the relationship between gold returns and inflation expectation than the expected inflation effect hypothesis does.