Should gold be stored in chaotic eras?

Abstract

This article explores the necessity to store gold in chaotic eras from the perspective of geopolitical risk (G.P.R.). We examine the casual relationship between G.P.R. and gold price (G.P.) by applying the full- and sub-sample rolling-window bootstrap causality test. The positive effect from G.P.R. to G.P. reveals that gold should be stored in chaotic eras, due to its rising price during high risks of geopolitics. However, the negative effect does not confirm this view, G.P. may decrease during certain high G.P.R. periods, which are not necessary to store gold. G.P. may also increase during periods of low G.P.R., in order to hedge risks of economic crises, rather than geopolitical events. These results are inconsistent with the capital asset pricing model, which highlights a positive effect from G.P.R. to G.P. In turn, the positive influence of G.P. on G.P.R. points out that the gold market can be an effective predictor of the risks of geopolitics. In the context of an unstable pattern of global politics, investors and governments can benefit from the gold value in the chaotic eras to avoid losses and optimize investment. In turn, they can accurately predict G.P.R. based on G.P., in order to prevent G.P.R.s.