Certain Precious Metals Can Hedge Political Risks – Seeking Alpha

My June 1, 2020, article “ Is it a Golden Opportunity?” examined the historical evidence on whether gold is a good inflation hedge (only over extremely long horizons, and failing dramatically over multiple decades); whether it acts as a hedge against equity risks (not perfectly, though it did increase in value in 83 percent of bear markets); whether it is under-, over- or fairly valued relative to a “golden constant” – the average real price of gold has been about 3.5 times the U.S. Consumer Price Index – (it’s overvalued); and the relationship of gold to the marginal cost of producing it (it’s well above current marginal costs). Today we’ll review new research on the hedging and safe-haven properties of precious metals (gold, silver, palladium and platinum).

Dirk Baur and Lee Smales contribute to the literature with their study “Hedging Geopolitical Risk with Precious Metals,” published in the August 2020 issue of the Journal of Banking & Finance. They examined whether there is any relationship between geopolitical risk and precious metals prices. They used the geopolitical risk (GPR) index (a monthly indicator of geopolitical risk based on a tally of articles from 11 leading international newspapers covering geopolitical tensions) of Dario Caldara and Matteo Iacoviello to examine the relationship between asset prices and geopolitical risk. Their goal was to determine if precious metals are potential hedges and safe havens. Their index captures an important dimension of uncertainty: the risk of events that