Is Gold Really a Good Hedge?

Bloomberg's Macro Man columnist set out to test whether gold really offers protection against market turmoil. What he found was a bit of a surprise.

Strategist Evans Sees Geopolitical Bid in Gold

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Gold bugs point to a myriad of reasons to own their favorite metal, from fiat currency debasement to gold’s history as a monetary unit. Among the favorites, however, is gold’s utility as protection against a market or political crisis. In August, for example, Bridgewater Associates LP’s Ray Dalio suggested Bloomberg Terminalinvestors should hold 5 percent to 10 percent of their portfolios in gold to hedge against rising political risks. I’m a macro strategist who writes Bloomberg’s Macro Man column, and I found myself wondering: Is gold really an effective hedge in periods of risk?


I decided to take a Mythbusters-style approach to find the answer. My first step was to search for evidence of a statistical relationship between risk aversion and the gold price. I used the CBOE Volatility Index (VIX) as a proxy for market risk aversion and ran a series of multifactor regressions to determine whether equity volatility is statistically significant as an explanatory variable for gold.

The answer, somewhat to my surprise, appears to be yes. I used monthly data from 1990 to 2015 and modeled the level of the gold price. Although the VIX wasn’t the most important driver—that would be inflation, followed by real U.S. 10-year yields—the t-statistic, a gauge of the importance of explanatory variables, shows up as highly significant. Interestingly, gold’s relationship with inflation over the past three decades has been sharply negative, suggesting the metal could drop as inflation rose. So its reputation as an inflation hedge appears somewhat exaggerated, though the results would likely look rather different if the 1970s were included in the analysis.