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The illusion of golden slumbers: geopolitical turbulence and the shifting link between gold and interest rates

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  • Michele Andreani

    (Central Bank of Malta, Financial Stability Research Office)

  • Marco Tedeschi

    (Università Politecnica delle Marche, Department of Economics and Social Sciences (DiSES))

Abstract

This paper investigates the impact of geopolitical shocks on the relationship between gold prices and the long-term real interest rate (RER) in the Euro area. Using a Time-Varying Parameter VAR model with Stochastic Volatility (TVP-VAR-SV), we find that gold does not display its traditional “safe-haven” behaviour against RER during episodes of geopolitical turmoil. Instead, gold functions as a weak hedge, while maintaining its broader safe-haven status within financial markets. Our results are robust across multiple model specifications and reveal substantial differences between the effects of perceived threats and actual acts of warfare. Furthermore, a Time-Varying Granger Causality (TV-GC) test identifies a unidirectional impact from RER to gold prices and highlights a persistent influence of geopolitical risk on gold over the last decade. These results underscore the rising importance of geopolitical shocks in portfolio allocation, offering valuable insights for both investors and policymakers.

Suggested Citation

  • Michele Andreani & Marco Tedeschi, 2025. "The illusion of golden slumbers: geopolitical turbulence and the shifting link between gold and interest rates," Empirical Economics, Springer, vol. 69(6), pages 3635-3662, December.
    • Handle: RePEc:spr:empeco:v:69:y:2025:i:6:d:10.1007_s00181-025-02842-w
    DOI: 10.1007/s00181-025-02842-w
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    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • Q3 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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