It’s commonly believed that Gold is a good diversifying asset, and for many years, this was true. Gold is often seen as a safe-haven asset, which means that investors turn to it when they are worried about the stock market. However, Gold has not always been a good investment. In fact, over the past few years, it has actually lost value. With the recent crisis, investors started asking the same question again: is Gold still a good diversifier?
Reference [1] examined this question using econometric models. It utilized data from G7 countries because of the existence of deep globally integrated financial markets across different financial assets including Gold. The authors pointed out,
The paper attempts to empirically validate the fundamental axiom that gold is a safe haven instrument and diversifying asset especially in turbulent markets by using the concept of financial cycles. The paper has used Baxter-King technique to filter out the cycles in the key financial markets. These filtered cycles have been used to arrive at the coefficients of the determinants of gold returns through UCM. The results hold significance as they imply that is Gold acts as a hedge to not only to US currency movements but financial market uncertainties as well. It also implies that gold’s role as a currency portfolio diversifier (primarily for USD) is more pronounced and effective than its role as an equity portfolio diversifier. Further, we observe that gold offers the role of diversifying asset and its behavior with stock returns helps to manage risks in bearish cycles as well as generate returns in bullish financial conditions.
In short, the article formally proved that Gold is still a good diversifier and a valuable hedge. In uncertain times, gold can provide stability and peace of mind for investors. We believe that the paper has some merits, but we note that the tests presented were in-sample.
What do you think about investing in gold and/or the validity of the results? Leave us a comment below.
References
[1] Ranjan, Aniket and Kumar, Naveen, Performance of Gold as a Financial Asset During Different Phases of Financial Cycles (2022). Available at SSRN: https://ssrn.com/abstract=3999531
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