The effects of economic uncertainty, geopolitical risk and pandemic upheaval on gold prices

Abstract

This paper tests whether gold can be used to hedge against various forms of uncertainty, using monthly data for the sample period from January 1998 through August 2020. The study presents a model featuring GED-GARCH(1,1) technique to examine gold return behavior for five regional markets: the U.S., U.K., European Union, China and India. The model relates gold returns to changes of economic policy uncertainty, changes of geopolitical risk, market volatility due to interest rate variations and equity market volatility resulting from a worsening in the pandemic while controlling for the inflation rate, stock returns, economic growth, and changes in the exchange rate. Testing of gold prices expressed in U.S. dollars, British pounds, Euros, and Chinese yuans finds evidence that gold returns respond positively to a rise in a set of uncertainty variables, suggesting that gold can be viewed as a hedge against uncertainties. However, tests of a gold return equation in Indian rupee (or USD) show that some coefficients of uncertainty variables have negative signs because gold is most likely treated as an alternative to money.