Can gold hedge and preserve value when the US dollar depreciates?

This paper examines gold's hedging and value-preserving properties against fluctuations in the US dollar. We propose a likelihood ratio test that draws a distinction between hedging and safe-haven characteristics on the basis of the conditional dependence structure under different market condit...

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Bibliographic Details
Published in:Economic modelling 2014-04, Vol.39, p.168-173
Main Authors: Reboredo, Juan C., Rivera-Castro, Miguel A.
Format: Article
Language:English
Subjects:
American dollar
Currency devaluation
Dollar
Economic theory
Exchange rates
Foreign exchange rates
Gold
Gold markets
Hedge
Hedging
Market structure
Risk management
Safe haven
Studies
U.S.A
Value
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Summary:This paper examines gold's hedging and value-preserving properties against fluctuations in the US dollar. We propose a likelihood ratio test that draws a distinction between hedging and safe-haven characteristics on the basis of the conditional dependence structure under different market conditions. Our evidence, based on an analysis of data for US dollar exchange rates with a broad set of currencies, indicates that gold can serve as a hedge against US dollar depreciation but is a weak safe haven against extreme US dollar movements. These results have implications for risk management and hedging strategies. •We examined gold's hedging and value-preserving abilities against fluctuations in the USD.•We used a likelihood ratio test based on the dependence structure of gold and USD depreciation.•For a broad set of currencies, the evidence indicates that gold acts as a hedge against USD depreciation.•Gold acts as a weak safe haven against extreme USD movements.
ISSN:0264-9993
1873-6122
DOI:10.1016/j.econmod.2014.02.038