Performance of Gold as a Financial Asset During Different Phases of Financial Cycles
Aniket Ranjan and Naveen Kumar (Reserve Bank of India)
January 2022
The paper examines the fundamental relationship between gold and financial markets within the framework of unobserved components model. It measures the performance of gold as a financial asset during different phases of financial cycles (credit, equity and property). The paper explores discrete series of peaks and troughs to determine the financial cycles across markets using a combination of Baxter-King filter and Harding and Pagan’s methodology. The paper estimates the time varying coefficients by regressing gold returns on other assets like US dollar (DXY) and stocks (MSCI) to evaluate the diversifying attribute of gold. It further explores the time-dependent relationship between gold returns and financial market characteristics like liquidity, volatility and yield spread to better understand its role as a safe haven. The results show that gold does behave like a diversifying asset and can be used as a risk hedge during turbulent times. The results illustrate that this attribute is strengthened during periods of volatility which places gold as a safe haven asset. This behaviour is also reflected in the rise of gold prices after the global financial crisis as well as the most recent Covid-19 related market upheavals.

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