Abstract
In this paper, we examine the predictive content of both transition and physical risks for the volatility of gold return as well as the utility gains of observing these risks. Our results offer the following distinct contributions to the literature. One, we show that the return volatility of gold has a positively significant relationship with transition risk and a negatively significant relationship with physical risk. Given some salient features of gold, its safe-haven property, and its rarity in nature, our result appears very plausible. Two, we find evidence for out-of-sample predictability between the return volatility of gold and both transition and physical risks although with greater predictive prowess from the former. Lastly, we confirm that accounting for both transition and physical risks guarantees higher economic gains for a utility-maximizing investor that observes these risks in the gold market. We further demonstrate the robustness of our findings to multiple forecast horizons and alternative commodities.
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