Gold and the Global Financial Cycle

This study examines the safe-haven property of gold (along with several other precious metals including silver, platinum, palladium and rhodium) from a novel perspective by analyzing the impact of negative market shocks induced by the Global Financial Cycle (GFCy) via a large-scale global vector autoregressive (GVAR) model of 33 countries that covers both developed and emerging markets. The GVAR methodology provides an appropriate framework in our context as it allows us to capture the transmission of global shocks while simultaneously accounting for individual country peculiarities. Utilizing quarterly data over 1979:Q2 to 2019:Q4, we find that not only gold, but also silver and platinum serve as good hedges in periods of financial market distress resulting from a negative shock to the GFCy index. Interestingly, silver and platinum are found to be better hedges compared to gold implied by greater positive returns in response to negative GFCy shocks, compared to this traditionally accepted safe haven. Overall, our results support the hedging benefits offered by precious metals, suggesting that investors can offset losses resulting from global financial shocks by investing in not only gold, but more so in platinum and silver, while a great deal of heterogeneity is observed across the precious metals in terms of their hedging ability.