Motivated by the recent gold price boom, this paper examines whether an asset
bubble exists in the gold market. We approximate gold’s fundamental value using
several econometric models and apply a Markov regime-switching Augmented
Dickey-Fuller (ADF) test which has substantial power for detecting explosive behavior.
Although our results are sensitive to the specification of the fundamental
value, we show that a model accounting for the current European sovereign debt
crisis accurately tracks the gold price observed in the market. We also note
that inflation in a general commodity price index and gold ETF demand have a
potential to explain the price trajectory.