The safe haven potential of gold against oil price risk is examined.
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The analysis relies on the asymmetric VARMA-GARCH model with daily frequency.
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Gold is found to exhibit a significant safe haven against oil price risks.
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The optimal portfolio and hedging ratios support this evidence.
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Further analyses involving other precious metals reveal similar outcomes.
Abstract
This paper assesses the role of gold as a safe haven or hedge against crude oil price risks. We employ the asymmetric VARMA-GARCH model, using daily data from January 2016 to August 2020. To account for the impact of COVID-19 pandemic, we partitioned the data into two to reflect the periods before and during the pandemic. Our empirical results find gold as a significant safe haven against oil price risks. The optimal portfolio and hedging analyses conducted also validate the hedging effectiveness of gold against risk associated with oil. The robustness of our results is further confirmed using three other prominent precious metals - silver, platinum, and palladium. In sum, our results are useful for investors and portfolio managers that are desirous of using gold and other precious metals as portfolio rebalancing tools to minimize or circumvent risks associated with volatile oil returns.
