What Drives Gold Returns? A Decision Tree Analysis

Abstract

The behavior of gold as an investment asset has been researched extensively. For the very long run, that is several decades, gold does not outperform equities. However, for shorter periods, gold responds to fears of inflation, stock market corrections, currency crises and financial instabilities very vigorously. In this paper we follow a decision tree methodology to investigate the behavior of gold prices using both traditional financial variables such as equity returns, equity volatility, oil prices, and the euro. We also use the new Cleveland Financial Stress Index to investigate its effectiveness in explaining changes in gold prices. We find that gold returns depend on different determinants across various regimes.

Keywords: Key words: Gold Prices, Uncertainty, Decision Tree Analysis, Financial Stress Index

JEL Classification: C88, D81, G17, G1