Does Gold Act as a Safe Haven and Hedge for G7 Stock Markets? A Comparative Assessment between COVID-19 Versus Global Financial Crisis (GFC)

Abstract

This paper investigates the safe haven property and hedge of gold especially during GFC and COVID-19 for G7 stock markets. We use dynamic conditional correlation (DCC) and wavelet coherence analysis. Our finding reveals that the dynamic conditional correlation between gold and each G7 stock market decreased significantly during extreme market conditions, especially during GFC and COVID-19. The results show that gold served as a strong safe haven asset for all G7 stock markets except Nikkei225 during GFC. However, gold is maintained this traditional role as a safe haven only for CAC40, S&PTSX, FTSE/MIB, and FTSE100 during the COVID-19 pandemic. The optimal portfolio weights of gold in each G7 stock market significantly increased during GFG and COVID-19 pandemic, meaning that investors should invest more in the gold as a ‘flight-to- safety asset’ during market turmoil. In addition, by decomposing the coherence between gold and each G7 stock market into three investment horizons (short, medium, long), we find that total we also found a weak correlation in short term (up to 16 days) and the long-term (frequency band 128 - 1024 days) for the normal and extreme conditions market during the sample period. This result provides evidence that gold is considered a safe haven for the G7 stock market in the short and long horizons.

Keywords: COVID-19, GFC, Gold, G7 stock indexes, DCC-GARCH, Wavelet coherence