Blog - Investing Notes

December 21, 2006 - Gold as Hedge and Safe Haven

Is the conventional wisdom that gold is a hedge and safe haven accurate? In their December 2006 paper entitled "Is Gold a Hedge or a Safe Haven? An Analysis of Stocks, Bonds and Gold", Dirk Baur and Brian Lucey analyze the role of gold during normal market conditions and during extreme market events. Specifically, they measure whether gold acts as: (1) a hedge with returns that are on average uncorrelated or negatively correlated with those of stocks and bonds; and/or, (2) a haven that does not follow stock and bond values downward when when these latter assets crash. Using daily MSCI stock and long-term bond indices and daily U.S. spot gold prices over the period December 1995 through November 2005, they conclude that:

• Gold has a lower mean return than stocks and bonds.
• Returns for U.S. stocks and gold exhibit a slight positive correlation, as do long-term U.S. bonds and gold. (See the table below.)
• The volatility of gold returns often decreases when the volatility of stock returns increases. However, gold is often more volatile than bonds.
• Gold acts a hedge for stocks in that gold normally provides positive returns when stock returns are negative.
• Gold acts as a safe haven during stock market crashes, but only for 15 trading days after crash onset. As stocks recover after a crash, gold returns turn negative. Stock-gold portfolios that purchase gold after a stock market crash underperform.
• Gold is neither a hedge nor a safe haven for bonds.
• Results are not clearly consistent across subsamples, suggesting that these stocks-bonds-gold relationships may not be reliable across differing economic conditions.

The following table, excerpted from the paper, shows the correlations of returns for U.S. stocks, U.S. bonds and gold for the entire sample period.

In summary, gold has offered some downside protection for stocks over the past decade, at the cost of some raw return.

For related research, see Blog Synthesis: Investing/Trading in Commodities and Commodity Futures.

Whether gold is a good investment vehicle is a bigger question. For additional information, the Wikipedia entry "Gold as an investment" offers interesting data and perspectives.