Changing Risk Appetite and Price Dynamics of Gold Vis-a-Vis Real and Financial Assets: Perspective from the Indian Market

Motivated by the changing dynamics of gold prices on account of the prevalent uncertainty amidst the COVID-19 pandemic coupled with the proactive policy interventions by the central bank and the government, this paper studies the linkages between gold, other precious metals (silver and platinum), industrial metals, and financial assets, including equity and debt, in the Indian context. The paper finds that gold is largely a commodity-market follower in terms of price dynamics. In terms of inflation volatility and real returns, gold is not only less volatile, but it also records higher real returns. The paper develops a risk appetite index for India, termed as the Composite Risk Appetite Index (CRAI), using ten indicators measuring different aspects of financial market uncertainty and analyses the effect of CRAI on returns and returns’ volatility of select commodities/assets including gold. The paper finds evidence of gold providing higher returns during periods of low risk appetite and thus, establishing itself as a safe haven asset, albeit with higher volatility of returns.