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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* Biden and Chinese leader Xi Jinping set for talk today
* Chinese carrier sails through Taiwan Strait ahead of Biden-Xi call
* Russian missiles strike western Ukraine city, near Polish border
* Surging Covid-19 cases in Europe suggest new wave will soon strike US
* Russian oil exports to India have quadrupled this month
* Mega-drought in American West is expected to continue in the months ahead
* US jobless claims fell last week, signaling tight labor market
* Philly Fed manufacturing indicator indicates faster growth in March
* US housing construction rose in February to highest level since 2006:

The Federal Reserve on Wednesday raised its target interest rate by ¼ point, the first hike since 2018. The shift in the posture of monetary policy isn’t surprising, given the surge in inflation. Equally unsurprising is the weak performance of fixed-income securities this year, which continue to price in rough times ahead for the asset class overall.

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* West says Russia becoming bogged down in Ukraine war
* Fed raises its benchmark interest rate 1/4 point–first hike since 2018
* Fed Chair Powell says recession risk is “not particularly elevated,” but…
* Some economists predict the Fed will cause a recession
* Russia is seizing hundreds of commercial jets owned by US and European firms
* Import prices for US rose 10.9% over past year, feeding into high inflation
* US homebuilder sentiment slips in March, fourth straight monthly decline
* Atlanta Fed business inflation expectations continue rising in March
* US retail sales rose less than expected in February as inflation heats up:

The Federal Reserve finds itself in an especially tough spot: raising interest rates at a time when economic growth is slowing. The rationale for tightening policy is that inflation is surging and so pricing pressure overrides any concerns for growth.

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* Ukraine’s Zelensky to ask US Congress for more help in speech today
* European leaders travel to Kyiv as Russia bombs the Ukrainian city
* Russia’s foreign minister says there is ‘hope’ for compromise with Ukraine talks
* Russia may default on its debt today as payments are due
* Forecasters raise US recession risk estimates as inflation outlook increases
* Fed funds futures predict a 25-basis-point rate hike for today’s FOMC meeting
* Raskin withdraws her candidacy for Federal Reserve board
* US wholesale inflation eases in February but still up 10% from year ago
* NY Fed Mfg Index shows contraction in March–first decline in nearly two years:

We already know that the recent inflation surge is still accelerating, and that it’s likely to heat up further in the months ahead as effects from the Ukraine war begin to factor into the data. One question that comes up is whether some or most of this pricing pressure is noise or signal? For some perspective, let’s estimate the inflation “cycle,” based on a simple estimate that attempts to capture the longer-term ebb and flow of inflation.

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* Ukraine-Russia talks fail as war grinds on
* Will Russia avoid first foreign-currency bond default since 1917 revolution?
* Ukraine war disrupts global supply of key parts and raw materials
* Three European leaders to visit Ukraine’s capital in show of support
* China warns of retaliation if hit with western sanctions linked to Russia
* New “stealth” variant of coronavirus spreading around the world
* Covid-19 cases more than double in one day in China as outbreak accelerates
* China reports better-than-expected growth in retail sales and industrial output
* China stocks falls sharply for second day as new covid lockdowns are announced
* US 10yr Treasury yield rises to 2.14%, near a three-year high:

In another week of widespread selling of the major asset classes, US inflation-indexed Treasuries continued to rise, based on a set of ETFs through Friday, Mar. 11.

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* Russian missile strikes near Polish/NATO border raise fears of expanding war
* Russia has requested military support from China, according to US officials
* New efforts emerge for peace talks between Ukraine and Russia
* Russian prosecutors warn that leaders of Western companies could be arrested
* US 10yr Treasury yield rises to 2.08% in early Monday trading, highest since 2019
* China battling multiple outbreaks of Covid-19 across cities
* Don’t let the news of the day derail your strategic investing plan
* US consumer sentiment in March falls to 11-year low as inflation rises: