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Hedging geopolitical risk with precious metals

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  • Baur, Dirk G.
  • Smales, Lee A.

Abstract

We analyse the relationship between geopolitical risk and asset prices and show that geopolitical risk is distinct from existing measures of economic, financial, and political risk and that the response of precious metals to geopolitical risk differs considerably from that of other assets. Precious metals are hedges against geopolitical risk in general and geopolitical threats (as opposed to acts) in particular. Conversely, stocks and bonds respond negatively to geopolitical risk and geopolitical threats. For extreme geopolitical risks, only gold and silver display consistent safe haven properties. Our results show that holding precious metals within a diversified portfolio lowers the impact of geopolitical risk.

Suggested Citation

  • Baur, Dirk G. & Smales, Lee A., 2020. "Hedging geopolitical risk with precious metals," Journal of Banking & Finance, Elsevier, vol. 117(C).
    • Handle: RePEc:eee:jbfina:v:117:y:2020:i:c:s037842662030090x
    DOI: 10.1016/j.jbankfin.2020.105823
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    More about this item

    Keywords

    Gold; Geopolitical risk; Safe haven; VIX; EPU; Precious metals;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • F5 - International Economics - - International Relations, National Security, and International Political Economy

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