Abstract
This paper investigates whether gold is an internal hedge and/or an external hedge against Turkish lira (TL) by using monthly data from January 1995 to November 2006. Cointegration test results confirm the long-term relationships between the gold price and consumer price index and between the gold price and TL/US dollar exchange rate. The Granger Tests, based on vector error correction model (VECM), indicate that gold price Granger causes the consumer price index and TL/US dollar exchange rate in a unidirectional way. It is concluded that gold acts as an effective hedge against potential future TL depreciation and rising domestic inflation. Furthermore, gold price may be considered as a good indicator of inflation and hence it can be used as a guide to monetary policy.