This article investigates the hypothesis that gold serves as a hedge and/or a safe- haven asset
against financial risks associated with exchange rates, equity, oil prices, and inflation in
Egypt, with its protective role depending on market conditions. To model this relationship,
semi-parametric quantile regression (QR) is employed using weekly data from January 7,
1998, to July 26, 2023. QR captures the conditional effects of these risk factors across the
distribution of gold returns, providing robust estimates that accommodate outliers and heavy
tailed data. Encompassing major events like the 2008 financial crisis and the COVID-19
pandemic, the Bai and Perron (1998) multiple breakpoints test, however, found no structural
breaks, allowing the analysis to proceed with the full sample period. Key findings include:
(1) no relationship between CPI inflation and gold returns across all quantiles is detected;
potentially due to cultural factors such as wedding-related purchases and hoarding behaviour,
(2) a negative association between gold return and EGX30 return is found across all market
states (5th to 95th quantiles), with significance primarily in normal market conditions (50th and
75th quantiles); implying that gold serves as a safe haven in extreme market conditions,
offsetting equity losses and hedging against stock return declines during stable periods, (3)
an asymmetric relationship is found between gold returns and stock volatility, as measured
by the conditional variance of stock returns derived from an AR(1)-GARCH(1,1) model,
with negative correlations in lower quantiles and positive correlations in higher quantiles, (4)
a positive but weak relationship is observed between gold and crude oil returns, significant in
lower quantiles and insignificant in higher quantiles, suggesting that the link weakens under
extreme market conditions, and (5) a consistent negative relationship is observed between
gold and exchange rate returns, where an appreciation in exchange rates leads to lower gold
returns, highlighting gold's role as an alternative investment during periods of currency
depreciation. The robustness of these findings is confirmed by a slope equality test, which
rejects the null hypothesis for all coefficients except inflation. These findings suggest that
gold plays a significant role in hedging against stock volatility, currency risk, and extreme
market conditions, and that both investors and the central bank should consider gold as a
strategic tool for diversification and risk management in Egypt. |
