Is Gold a Hedge and Safe Haven during Political Uncertainties?

Abstract

Technological advancements not only bolstered almost all activities, but also accelerated the spread of information in blinks. Thus, announcements about market volatilities along with subpar financial instruments’ performance have led investors to search for alternative assets to cope with amplified uncertainties. Investors in politically unstable economies, like Pakistan, are more prone to the risks of uncertainties so require some safe investments. Previously gold has been investigated as a hedge and safe haven during various economic and market conditions but literature lacks investigation of gold during political uncertainties. So by investigating the role of gold as a hedge and safe haven during political uncertainties against sectors of Pakistan Stock Exchange (PSX), the current study not only contributes to literature, but also contributes to the knowledge of Pakistani investors and asset managers that whether they should consider gold as a diversifier or not. The study incorporates daily gold prices (gold bullion Pkr. per Tola), daily stock prices of PSX sectors and political events of Pakistan for a time span of 2009 to 2019. Appling EGARCH with quantile dummies and event dummies, findings indicate that gold acts as a hedge and safe haven against the stock market and most of its sectors in normal as well as politically uncertain situations. Thus, Pakistani investors must consider gold in asset allocation strategies for having an optimal portfolio that can cope with the risk of acute market conditions and political uncertainties. Finings of current study facilitate Pakistani investors, investment advisors and asset managers to make healthy investment decisions and enjoying the benefits of diversification through inclusion of gold in their portfolios.