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Introduction
Over the past decades, the global financial markets have witnessed a string of financial crises, among them include the Mexican peso crisis in 1994, the Asian financial flu in 1997/1998, the Russian crisis in 1998, the Brazilian crisis in 1999, the Argentine financial crisis in 2001/2002 and most recently the US subprime crisis in 2007 and the Greece financial crisis in 2009. Mentioning of these crises is likely to conjure up in the mind of many the images of excessive risk in stock market investment and to bring back interest in gold as an alternative investment asset. This interest is well-placed as gold used to be a standard of value, is still considered as a store of value and is universally accepted. Moreover, there seems to be a strong belief that gold can provide protection, as a hedge or a safe haven, against this heightened risk in the financial markets. As noted by [3] Baur and McDermott (2010), gold differs from other assets in that it reacts positively to adverse market shocks. As they mention, real gold value reached its historic high roughly in 1980 when the global economy faced the threat of stagflation due to oil crises in 1970s. Likewise, at the time the US subprime crisis intensified in September 2008, gold has responded with a surge in its value ([3] Baur and McDermott, 2010).
Against a backdrop of recurring financial crises and contagion as well as emerging interest in gold, several studies have attempted empirical investigation of gold hedging property. Notable among these studies are recent works by [5] Capie et al. (2005), [7] Hillier et al. (2006), [2] Baur and Lucey (2010) and [3] Baur and McDermott (2010). [5] Capie et al. (2005) investigate an exchange rate hedge of gold using weekly data of gold price and sterling-dollar and yen-dollar exchange rates from January 1971 to February 2004. They find supportive evidence for exchange rate hedging property of gold, although the strength of hedging tends to vary over time. [7] Hillier et al. (2006) assesses the investment role of precious metals, namely gold, platinum and silver for the US market. They note low correlations between these three metals and stock market returns, which suggests diversification benefits of gold investment. [2]...