Gold as a Financial Instrument

Abstract

In this paper, we explore the effectiveness of gold as a hedging and safe haven instrument for a variety of market risks. Rather than confining the analysis to specific countries, we treat gold as a global asset and apply the novel Phillips, Shi and Yu (2015a,b) methodology to identify extreme price movements. This method accounts for both the level and speed of changes in price dynamics that better characterises periods of abnormally high risks. We find that gold is a strong safe haven for stock, European sovereign, and oil inflation market risks. We also show that gold is a strong hedge to inflationary and currency risks. We demonstrate that gold had exhibited safe haven properties during the 2020 Covid-19 crisis, and highlight the importance of considering explosive behaviour in identifying periods of risk.