29 Pages Posted: 19 Dec 2006 Last revised: 1 Sep 2015
Date Written: February 1, 2009
Is gold a hedge against sudden changes in stock and bond returns, or does it instead have a subtly different property, that of being a safe haven? This paper addresses these two interlinked questions. A safe haven is defined as a security that is uncorrelated with stocks and bonds in case of a market crash. This is counterpoised against a hedge, defined as a security that is uncorrelated with stocks or bonds on average. We study constant and time-varying relationships between stocks, bonds and gold in order to investigate the existence of a hedge and a safe haven. The empirical analysis examines US, UK and German stock and bond returns and their relationship with gold returns. We find that gold is a hedge against stocks on average and a safe haven in extreme stock market conditions. This finding suggests that the existence of a safe haven enhances the stability and resiliency of financial markets since it reduces investors' losses at times when a reduction is needed the most. A portfolio analysis further shows that the safe haven property is extremely short-lived so that an investor buying gold one day after a shock loses money.
Keywords: safe haven, hedge, hedging, gold, portfolio, stock market, bond market, stock-bond relationship
JEL Classification: G11, G14
Suggested Citation: Suggested Citation
Baur, Dirk G. and Lucey, Brian M., Is Gold a Hedge or a Safe Haven? an Analysis of Stocks, Bonds and Gold (February 1, 2009). Available at SSRN: https://ssrn.com/abstract=952289 or http://dx.doi.org/10.2139/ssrn.952289