How effectively and consistently do equities, bonds, oil, gold and the dollar serve as hedges and safe havens for each other? In their September 2010 paper entitled “Hedges and Safe Havens – An Examination of Stocks, Bonds, Oil, Gold and the Dollar”, Cetin Ciner, Constantin Gurdgiev and Brian Lucey investigate pairwise hedging and safe haven relationships among these five major assets/asset classes. The define an asset as a hedge (safe haven) for another if respective returns are uncorrelated or negatively correlated on average over the long term (during relatively short intervals of stress). They define the long term (relatively short intervals) as their entire sample period (rolling four-month subperiods). They define intervals of stress as returns in the lowest fourth of observations. Using daily levels of the S&P 500 Index, an index of 10-year Treasuries, nearest-month gold and oil futures and the Federal Reserve Nominal Trade Weighted Effective Index for the dollar from January 1985 through October 2009 (nearly 25 years), they find that:
- For hedging over the long term:
- Gold performs well as a hedge for all other assets except oil. It is the only consistently effective hedge for equities.
- Bonds, the dollar and gold effectively hedge each other, with the relationships arguably intermediated by inflation.
- Oil (more a commodity than a financial asset) does not hedge any of the other four assets, including the dollar.
- Equities do not hedge any of the other four assets.
- For a safe haven during most intervals of stress:
- Gold is a safe haven for equities and the dollar (emphasizing a view of gold as an anti-dollar), but not for oil.
- Bonds act as a safe haven for equities.
- Oil is a safe haven for bonds and the dollar.
- The dollar acts as a safe haven for oil and bonds.
- Equities are a safe haven for the dollar and oil.
In summary, evidence from the past 25 years indicates that gold is a versatile diversifier for other financial assets, but not for oil (or perhaps other commodities). Oil is less versatile.
