Measuring the response of gold prices to uncertainty: An analysis beyond the mean

TL;DR

This study examines how gold prices respond to different levels of economic and political uncertainty using advanced statistical methods, revealing that gold's role as a hedge varies with market conditions and uncertainty levels.

Contribution

It introduces a quantile-on-quantile regression approach combined with a dynamic factor model to analyze gold's response to multiple uncertainty sources across different market states.

Findings

Gold's hedge effectiveness varies with market conditions.

High uncertainty levels strengthen the positive relationship between gold and uncertainty.

Diversified portfolios including gold can mitigate exposure to uncertain risks.

Abstract

This paper provides an innovative perspective on the role of gold as a hedge and safe haven. We use a quantile-on-quantile regression approach to capture the dependence structure between gold returns and changes in uncertainty under different gold market conditions, while considering the nuances of uncertainty levels. To capture the core uncertainty effects on gold returns, a dynamic factor model is used. This technique allows summarizing the impact of six different indexes (namely economic, macroeconomic, microeconomic, monetary policy, financial and political uncertainties) within one aggregate measure of uncertainty. In doing so, we show that the gold's role as a hedge and safe haven cannot be assumed to hold at all times. This ability seems to be sensitive to the gold's various market states (bearish, normal or bullish) and to whether the uncertainty is low, middle or high. Interestingly, we find a positive and strong relationship between gold returns and the uncertainty composite indicator when the uncertainty attains its highest level and under normal gold market scenario. This suggests that holding a diversified portfolio composed of gold could help protecting against exposure to uncertain risks.