In countries like Pakistan, where the macroeconomic situation remains uncertain and inflationary expectations always linger to a high level, investors stay in search of such costeffective or profitable investment opportunities that can be able to provide their capital an effective hedge against inflation. Therefore, the present study aims at empirically testing the status of gold as a potential hedge against inflation. The study whirls around analyzing the nature of the relationship of expected and actual inflation with gold return and its cost of carrying i.e. the interest rate. By employing autoregressive moving average (ARMA) with generalized autoregressive conditional heteroscediasticity (GARCH) models, the time varying relationship between the variables is studied. The data sample used in the study ranges from January, 2001 to December, 2013. The results support gold as an effective hedge against inflation in Pakistan; since, the return on gold investment exceeds its cost of carrying with the view of changing expected inflation. Supervisor:- Dr. Attiya Yasmin Javid