Current versus forward-looking oil shocks and the asymmetric response of precious metal returns: evidence from daily and weekly data

Utilizing non-linear Markov-switching models, and daily and weekly underlying shocks to the oil market, this study examines the response of precious metal returns to current and forward-looking oil demand and supply shocks for the period June 2007–December 2023. The objective of this study is to compare the impact of current and forward-looking as well as daily/weekly and monthly oil shocks on precious metal returns in both low volatility and high volatility regimes. Findings show that it is the forward-looking oil demand shock, not the current oil demand shock, that matters for the returns of the precious metals, such as gold, silver, platinum and palladium. The signs of the coefficients affirm precious metals’ role as hedge against anticipated economic distress as signalled through the oil market. The effects are more pronounced in high volatility regimes than in low volatility regimes. However, when low-frequency monthly data are used, the effects are averaged out resulting in many statistically insignificant coefficients. This emphasizes the importance of high-frequency data for policy makers and short-term investors who need the information in real-time.