Hedging Market Volatility with Gold

Abstract

The 2008 financial crisis refocused investors’ attention to several safe-haven assets, most notably gold and US Treasuries. We compare the role of these two assets as potential hedge instruments for thirteen major indexes’ returns and their volatilities. Our study extends the literature by using gold returns purged from the effects of being denominated in US dollars. We also utilize seventeen different volatility indexes to include US and international equities as well as currencies instead of the common S&P-500 index. While gold and Treasuries are comparable in their correlation with contemporaneous market returns, Treasuries seem to be safe haven asset of choice. Gold is more correlated than Treasuries in terms of lead-lag relationships with market returns as well as market volatility indexes.

Keywords: Gold, US Treasuries, safety asset, safe haven, volatility

JEL Classification: G10, G11, G15