Gold as a hedge against the dollar

This 2005 paper examines whether the dollar value of gold acts as a effective hedge against movements in the Dollar/Yen and Dollar/Sterling exchange rates between 1971 and 2004. The abstract states that:

The extent to which gold has acted as an exchange rate hedge is assessed using weekly data for the last thirty years on the gold price and sterling–dollar and yen–dollar exchange rates. A negative, typically inelastic, relationship is indeed found between gold and these exchange rates, but the strength of this relationship has shifted over time. Thus, although gold has served as a hedge against fluctuations in the foreign exchange value of the dollar, it has only done so to a degree that seems highly dependent on unpredictable political attitudes and events.

So the dollar value of gold does act as a hedge for $/¥ and $/£ but the usefulness of the hedge varies between the currencies and over time. Response times are very fast with the short and long term elasticities very similar. Found that shocks are persistent. Error distributions are generally found to be fat tailed.

Method: Used a variety of AR and ARCH models and found EGARCH (2,1) to be most appropriate.

Data: Logged first differences of Dollar/Yen, Dollar/Sterling and Dollar/Gold exchange rates. 30 years of weekly data using the Friday 3pm Fixings, from 8 Jan ’71 – 20 Feb ’04.

Full Citation: Capie, F., T. C. Mills and Wood, G. (2005). “Gold as a hedge against the dollar.” Journal of International Financial Markets, Institutions and Money 15(4): 343-352.