Gold and the U.S. dollar: tales from the turmoil

Abstract

We investigate how the relation between gold prices and the U.S. Dollar has been affected by the recent turmoil in financial markets. We use spot prices of gold and spot bilateral exchange rates against the Euro and the British Pound to study the pattern of volatility spillovers. We estimate the bivariate structural GARCH models proposed by Spargoli e Zagaglia (2008) to gauge the causal relations between volatility changes in the two assets. We also apply the tests for change of co-dependence of Cappiello, Gerard and Manganelli (2005). We document the ability of gold to generate stable comovements with the Dollar exchange rate that have survived the recent phases of market disruption. Our findings also show that exogenous increases in market uncertainty have tended to produce reactions of gold prices that are more stable than those of the U.S. Dollar.

Gold bubbles: When are they most likely to occur?

“…We confirm previous findings suggesting that gold can act as a hedge or a safe haven in times of turmoil (Bertus and Stanhouse, 2001;Baur and McDermott, 2010;Chan et al, 2011;Zagaglia and Marzo, 2013). Consequently, we show that financial crisis periods should be accounted for when identifying bubbles in gold prices.…”

The gold price in times of crisis

“…The study of Batten et al (2010) provides only limited evidence that the volatility of the gold market is affected by the same macroeconomic factors as is the case for other precious metals. The risk-mitigating characteristics of gold have been discussed in prior literature, which evaluated the increasingly important role of gold as a dollar hedge (Capie et al, 2005;Tully and Lucey, 2007;Sjaastad, 2008;Zagaglia and Marzo, 2013), an inflation hedge (Adrangi et al, 2003;Worthington and Pahlavani, 2007;Blose, 2010) and a portfolio diversifier (Jaffe, 1989;Hillier et al, 2006). 2 In addition, gold is regarded as a safe haven in times of turmoil (Baur and Lucey, 2010;Baur and McDermott, 2010;Chan et al, 2011;Ciner et al, 2013).…”

A real-time quantile-regression approach to forecasting gold returns under asymmetric loss

“…Mensi et al (2014) use quantile regressions to study how emergingmarket stock-market returns depend on gold returns and other macroeconomic and financial factors. Dee et al (2013) use quantile regressions to explore the link between gold returns, stock-market movements and inflation, and Zagaglia and Marzo (2013) use quantile regressions to study the link between gold returns and exchange-rate movements. Jeong et al (2012) exchange-rate movements.…”