Is gold a hedge and safe haven for other asset classes globally? In their September 2020 paper entitled “Gold as a Financial Instrument”, Pedro Gomis‐Porqueras, Shuping Shi and David Tan explore effectiveness of gold as hedge and safe haven for a variety of international market risks. They define a hedge as an asset with return uncorrelated or negatively correlated with that of another asset overall. They define a strong (weak) safe haven as an asset with return negatively correlated (uncorrelated) with that of a crashing asset. Their methodology accounts for both the magnitude and speed of asset price change. They focus on reactions of gold price to crises associated with European government debt, crude oil (an inflation proxy) and equity markets. Using gold, European government debt, crude oil and stock market prices and U.S. dollar exchange rates with other currencies during June 1997 through June 2020, they find that:
- Gold is a weak hedge (uncorrelated returns) for each of equity and European government bond markets, and a strong hedge (significantly positive correlation) for inflation as proxied by crude oil price.
- Gold is a strong safe haven for each of equity, European government bond and crude oil (inflation) markets.
- Gold is a near perfect hedge for U.S. dollar exchange rate movements.
- Gold acts as a safe haven during the 2020 COVID-19 crisis.
In summary, evidence indicates that gold broadly functions as a hedge and safe haven for equities, European government bonds and inflation.
Cautions regarding findings include:
- The sample of crises is not large.
- As in other research of this kind, the study does not devise and test strategies for exploiting findings in hypothetical portfolios.
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