The research problem revolves around the uncertainty faced by managers of international investment portfolios in a financial environment characterized by escalating systemic risks (such as financial crises, pandemics, and geopolitical conflicts) and sharp fluctuations in the value of major currencies, foremost among them the US dollar.

Despite the prevailing belief that gold represents a safe haven and an effective hedge against these risks, the empirical evidence on its effectiveness varies and is influenced by the nature of the crisis and the economic context. Therefore, the research problem emerges in the need for a quantitative and accurate assessment of gold’s effectiveness as a dual hedging tool: 1.

A hedge against risks resulting from fluctuations in the US dollar exchange rate.

The gap is evident in the need for an analysis that distinguishes between gold’s performance in normal times compared to periods of severe crises, and that measures the degree and efficiency of this hedge in different compositions of investment portfolios.

This research sought to achieve the main objective of assessing the effectiveness of gold as a tool for hedging against US dollar risks and systemic crisis risks in international investment portfolios.

The following sub-objectives can be derived from this main objective: 1.

Analyzing the dynamic relationship between investment returns in gold and fluctuations in the US Dollar Index (DXY) in the short and long term.

The research will start from a general main hypothesis stating that gold possesses high statistical and economic effectiveness as a tool for hedging against the risks of a decline in the value of the US dollar, as well as a safe haven during periods of systemic crises in the context of international investment portfolios.

From this main hypothesis, a set of detailed hypotheses (main and sub-hypotheses) can be formulated, which can be divided into two main groups:

Group One: Hypotheses for Hedging against Dollar (Exchange Rate) Risks.

Main Hypothesis 1: There is a statistically significant inverse relationship between gold returns (in dollars) and the returns of the US Dollar Index (DXY) in the long term.

Sub-Hypothesis 1.a: The strength and negativity of the correlation coefficient between gold and the dollar increase during periods of heightened volatility in the foreign exchange market.

Sub-Hypothesis 1.b: Gold achieves an optimal hedge ratio with statistical significance and high hedge effectiveness when added to a portfolio consisting of dollar-denominated assets.

Group Two: Hedging Hypotheses during Systemic Crises (Safe Haven).

Main Hypothesis 2: The risk-adjusted returns of portfolios containing gold perform significantly better than portfolios without gold during periods of systemic crises (financial, geopolitical, pandemic).

Sub-Hypothesis 2.a: The correlation relationship between gold and international stock markets (such as S&P 500, Euro Stoxx 50) shifts from positive or neutral in normal conditions to a statistically significant negative one during the peak of systemic crises.

Sub-Hypothesis 2.b: The degree of gold’s effectiveness as a safe haven varies depending on the nature of the systemic crisis (for example, it is more effective in financial and geopolitical crises than in crises causing severe deflationary recessions).

This study provides real added value by combining deep theoretical analysis with precise econometric application, to provide practical answers to one of the most pressing questions in the world of international investment today: how can the world’s oldest asset (gold) be used to confront its newest and most complex challenges (currency risks and systemic crises)?

This study is limited to the following boundaries: 1.

Thematic Boundaries: The study focuses on analyzing the role of gold as a hedging tool only, excluding other alternative assets such as digital currencies or other commodities, in facing the risks of the US dollar exchange rate and systemic crises represented by financial and geopolitical crises.

This research is structured into five sequential chapters. It begins with a General Introduction outlining the problem, objectives, and hypotheses regarding gold’s hedging role. The Theoretical Framework and Literature Review follows, establishing the financial characteristics of gold and reviewing prior studies. The Methodology chapter details the quantitative approach, data sources, and econometric models (e.g., ARDL, GARCH) used for analysis. Subsequently, the Statistical Analysis and Results chapter presents descriptive statistics, hypothesis testing, and the calculation of optimal hedge ratios. The study concludes with a Discussion, Recommendations, and Conclusion chapter, which interprets the findings, offers practical advice for investors, and suggests directions for future research.

To ensure clarity and semantic specificity, the main terms in this research are defined as follows: 1.

Hedge: Operational Definition: An investment strategy aimed at reducing or eliminating non-systemic risks in an investment portfolio, by taking an opposite position in another financial asset (like gold) characterized by an inverse or weak correlation with the performance of the risky assets during periods of sharp fluctuations in the dollar exchange rate or systemic crises (Baur, Lucey, 2010).

2.1.1. The concept of gold as a financial asset: Characteristics and history

Gold holds a unique position in the global financial system, combining characteristics of a commodity, a currency, and a store of value. Unlike traditional financial assets that represent a claim on an issuing entity (like stocks and bonds), gold is a physical asset with no counterparty risk, making it a unique hedging tool against market fluctuations and systemic risks. ¹

Brief historical overview

Historically, gold was the basis of the global monetary system for long periods, most notably during the classical gold standard (1870–1914) and subsequent systems. The United States’ complete abandonment of the dollar’s link to gold in 1971 (Nixon Shock) led to the floating of the gold price and its transformation into a financial asset whose price is determined by market forces. This shift allowed for the study of its modern role as a hedging tool.

Key financial characteristics of gold 1.

Store of Value: Gold retains its purchasing power over the long term, especially in times of high inflation, as its supply cannot be arbitrarily increased like fiat currencies (Baur & McDermott, 2016).

Gold derives its effectiveness as a hedging tool from its unique characteristics, which are fundamentally different from traditional financial assets. Being a non-productive asset, representing a claim on no one, and retaining its intrinsic value, makes it a preferred refuge in the face of currency risks (like the dollar) and systemic crises that undermine investor confidence in the traditional financial system.

2.1.2. Theories of hedging and risk management in investment portfolios 1.

Modern Portfolio Theory (MPT):

Basic Principle: Focuses on selecting assets not only based on their individual risks, but on how they contribute to the risk and return of the portfolio as a whole. The key is portfolio diversification. MPT shows that adding assets with low or negative correlation to the core portfolio elements (like dollar-denominated stocks and bonds) can reduce overall risk without sacrificing expected return. Gold, with its distinctive characteristics, is a strong candidate for this role. 2.

Hedging as a Risk Management Strategy:

Basic Principle: Hedging is an investment aimed at reducing non-systemic (non-market) or systemic (market) risks. It involves taking an opposite position to a risky asset. Gold is used as a hedging tool: •

Hedge against exchange rate risk: If the dollar’s value decreases, the price of gold (denominated in dollars) tends to rise, offsetting losses in the real value of other dollar-denominated assets.

Measures the systemic risk of an asset relative to the market as a whole (Beta). An asset with low beta is less volatile than the market. Gold typically features a low or even negative beta relative to stock markets. This means it does not necessarily move in the same direction as the market, enhancing its role as a hedging and stabilizing tool during market crashes. 4.

Behavioral Portfolio Theory (BPT):

Investors make decisions under the influence of psychological biases (like loss aversion, herd behavior). They build their portfolios in “layers” to achieve different goals (like safety versus speculation). This explains why, during crises, investors collectively and fearfully move towards “safe haven” assets like gold, enhancing its effectiveness as a hedging tool specifically in these periods, even if fundamental economic relationships suggest otherwise.

2.1.3. Risks of the US dollar exchange rate and its impact on international assets

The US dollar (USD) is the dominant global currency in international transactions and central bank reserves, and its exchange rate. Therefore, fluctuations in its value not only affect the US economy but extend to form systemic risks for international investors. Exchange rate risk arises from unexpected changes in the value of the dollar against a basket of other currencies, converting the real returns of international assets (like stocks and bonds) even if their nominal returns locally are positive.

Channels of Influence: 1.

Translation Effect: When an investor converts the returns of their foreign investments (in local currency) back into US dollars, these returns may be eroded if the foreign currency depreciates against the dollar. For example, achieving a 10% return on an investment in Europe may turn into a loss if the Euro depreciates against the dollar by 15% during the same period.

Relationship with Systemic Crises

During periods of uncertainty and global financial crises, the dollar acts as a “safe haven”. Investors globally rush to buy dollar-denominated assets (like US Treasuries), leading to a sharp appreciation in its value. This appreciation creates enormous pressure on: •

Emerging Markets: Which have dollar-denominated debt.

Because of this dual effect – as a constant challenge in normal times and a compounding shock during crises – the urgent need for effective hedging tools emerges. Here comes the role of the research to explore whether gold, as a unique financial asset largely independent of any government, can be a protective shield against these interconnected risks.

2.1.4. Nature of systemic crises (Financial, Geopolitical, Pandemic) and their characteristics

Systemic crises are defined as severe, widespread shocks that disrupt the functioning of the entire global financial or economic system, not just an isolated part. This type of crisis is characterized by complex correlations and contagion effects that make traditional investment assets highly correlated, losing their effectiveness as hedging tools and increasing the need for uncorrelated safe-haven assets.

Nature of Major Types of Systemic Crises: 1.

Financial Crises:

Failure of Traditional Correlations: Failure of traditional portfolio diversification strategies as all risky assets become negatively correlated during the crisis.

Unprecedented Policy Response: Tend to trigger massive, coordinated monetary and fiscal policy responses.

2.1.5. Factors affecting the price of gold (Supply and demand, interest rates, inflation, market value of the dollar)

The price of gold is the result of the interplay of a complex set of economic, financial, and geopolitical factors. Understanding these factors is essential to assessing its effectiveness as a hedging tool. These factors can be classified as follows: 1.

Interest Rates and Monetary Policy:

Gold represents a Non-Yielding Asset. Therefore, its relationship with interest rates is inverse. When central banks (like the US Federal Reserve) raise interest rates, income-generating assets (like bonds) become more attractive, increasing the opportunity cost of holding gold and putting downward pressure on its prices. The opposite is true in periods of monetary policy easing. 2.

Inflation:

The purchasing power of fiat money. In periods of high inflation, currency loses its value, prompting investors to turn to gold as a hedge, leading to increased demand and higher prices. 3.

Strength of the US Dollar (USD):

Gold is priced globally in US dollars. Therefore, a strong inverse relationship exists between them. When the Dollar Index (DXY) rises, buying gold becomes more expensive for holders of other currencies, dampening global demand and lowering the price. Conversely, a weak dollar makes gold cheaper, leading to higher demand. 4.

Physical Supply and Demand:

Supply: Affected by mining production (primary production) and recycling of old gold (secondary production). Any shocks in the supply chain can affect the price.

Demand: Includes demand for jewelry (especially in traditional markets like India and China), industrial demand (due to its conductive properties), and demand from central banks (which buy it to diversify their foreign reserves). 5.

State of Uncertainty and Systemic Crises:

Gold acts as a Safe Haven. During periods of geopolitical turmoil, financial crises, or economic recessions, demand for it increases as investors flee high-risk assets (like stocks), leading to a sharp rise in its prices.

2.2.1. Presentation of previous studies that addressed gold’s role in hedging dollar risks

Many global studies have addressed the relationship between the price of gold and the value of the US dollar, as gold is traditionally viewed as a safe haven and an alternative currency when confidence in fiat currencies, especially the dollar, weakens. These studies can be classified into two main axes: 1.

Studies Confirming Gold’s Effectiveness as a Long-Term Hedge against the Dollar:

The vast majority of research confirms a long-term inverse relationship between the price of gold and the Dollar Index (DXY). When the dollar weakens, investors tend to shift their funds to gold as a means of preserving value, driving its prices higher. This relationship makes gold an effective hedging tool in international portfolios exposed to US dollar exchange rate fluctuations. A study by Beckmann et al. ⁵ found that the negative relationship between gold and the dollar is one of the most stable relationships in financial markets, especially under expansionary monetary policies that weaken the currency’s value. 2.

Studies Defining the Nature and Contexts of this Effectiveness:

Other research has focused on detailing this relationship, indicating that it may not be constant at all times or under all conditions. The degree and effectiveness of hedging vary depending on the time frame (short versus long term) and market condition (calm and turbulent). Reboredo ⁵ indicated that gold retains strong hedging properties against the dollar in the long term, but these properties may weaken in the short horizon due to market noise and speculation. In the context of crises, a study by Baur and Smales ⁶ found that gold’s role as a hedge against dollar risks is enhanced during periods of acute geopolitical tension, where investors flee dollar-denominated assets to the safety of gold.

2.2.2. Presentation of previous studies that addressed gold’s role in hedging during crisis periods

Economic and financial literature has widely affirmed the exceptional role of gold as a safe haven during periods of turmoil and uncertainty. These studies can be classified based on the type of crisis they addressed: 1.

Financial and Economic Crises:

Global Financial Markets Crisis (2008): This crisis forms a central focus in most studies. A study by Baur and McDermott ⁷ showed that gold maintained its value and even rose during the peak of the crisis, confirming its role as a hedging asset against systemic collapses in financial markets in both developed and emerging economies.

Periods of Recession and Inflation: A study by Beckmann et al. ⁸ indicated that gold’s effectiveness as a safe haven is significantly enhanced during periods of economic recession and high inflation, as it acts as a preserver of real value when fiat currencies lose their purchasing power. 2.

Global Disaster Crises (COVID-19 Pandemic):

The pandemic posed a real test for asset behavior. In this regard, a study by Ji et al. ⁹ found that in the initial months of the pandemic (Q1 2020), gold experienced a short-term decline due to liquidity-selling pressures, but it recovered quickly and strongly, reaching record levels, proving its efficiency as a safe haven in the medium and long term during global health crises and sharp economic contractions.

A study by Salem et al. ¹⁰ confirmed these results, noting that gold was one of the most effective assets in improving the performance of diversified investment portfolios during the pandemic, providing positive returns and significantly reducing losses. 3.

Geopolitical Crises and Uncertainty:

Many studies have linked the rise in the price of gold to increases in economic and political uncertainty indices. For example, a study by Bouoiyour et al. ¹¹ showed that gold responds strongly to geopolitical uncertainty shocks, as investors shift to it as a tangible and liquid asset away from risk-laden assets.

A study by Bialkowski et al. ¹² supported this perspective, finding that gold plays a pivotal role in hedging investment portfolios during periods of major international tensions, such as armed conflicts and pivotal elections.

2.2.3. Discussion of previous studies’ results and identification of the research gap addressed by this research

It can be concluded from previous literature that there is a consensus that gold represents an effective hedging tool against the risks of a decline in the US dollar in the long term, especially in environments of uncertainty. However, there remains a need to examine the continuity of this effectiveness under modern monetary variables (such as sharp interest rate hikes) and amidst different types of systemic crises (like health and evolving geopolitical crises), which this research will seek to explore. Despite this broad consensus on gold’s role as a safe haven, most studies have focused on analyzing gold’s effectiveness during a specific type of crisis (like a financial crisis or a pandemic). ^{2, 4, 5, 7, 9, 10} Therefore, this study seeks to fill the gap by providing a comparative and comprehensive analysisof the effectiveness of gold in hedging against a variety of systemic crises (financial, health, geopolitical) simultaneously, and measuring the degree and persistence of this effectiveness across different phases of the crisis, with a special focus on the interaction between dollar risks and these crises in the context of international portfolios.

This study will rely on a quantitative analytical methodology, using time series analysis to examine the effectiveness of gold as a hedging tool, while adopting a multiple case study model for different systemic crisis periods. The primary goal is to measure and test the dynamic relationships between gold returns, returns of traditional assets (represented by stock and bond indices), and US dollar exchange rate risks, under normal market conditions and during crisis periods.

General Design of the Methodology: 1.

Quantitative Approach: Historical high-frequency data (monthly or daily) for a set of financial asset prices will be collected for extended time periods.

Primary Data Sources: ▪

Bloomberg Terminal database

Secondary Data Sources:

The research relied on secondary data obtained from reliable global financial and economic databases, to cover the specified time period of the study. The data included the following: 1.

Gold Prices: The global price per ounce of gold in US dollars was used (e.g., Gold Fixing Price 3:00 P.M. in London) or Gold Futures prices.

▪

Autoregressive Distributed Lag (ARDL) model.

To analyze the data and test the research hypotheses, reliance was placed on the open-source statistical program R, version 4.3.0 or later, using the RStudio development environment. The R program was chosen due to its power in processing time series, its flexibility in implementing complex economic models, and its active support community ensuring constant updating of statistical packages. ¹³

Statistical and econometric analyses were performed using the following packages in R: •

Time Series Analysis and Data Stationarity: The `tseries` package ¹⁴ was used to perform unit root tests (like the ADF test) to ensure the stationarity of time series, a prerequisite for applying standard models.

Descriptive analysis aims to provide a preliminary statistical summary of the data used in the study, helping to understand the basic characteristics of the time series returns of interest before moving to more complex econometric models. Key descriptive statistical measures were calculated, namely the mean (average), standard deviation, skewness coefficient, and kurtosis coefficient, for the overall periods and separate crisis periods.

Data and Methodology:

The sample included monthly data for the following variables for the period from January 2000 to December 2023: •

Gold Returns (XAU): Represented by the monthly return of the change in the price of a gold ounce in US dollars.

Preliminary Results:

Table 1 shows the results of the descriptive analysis of the data during the overall study period.

The following is evident from Table 1: 1.

Mean and Return/Risk: Gold shows the highest average monthly return (0.89%) compared to other assets during the overall period, indicating its strong long-term performance. However, its standard deviation (4.12%), as a measure of risk, was high compared to the dollar index and bonds, but lower than stock risk (4.38%), reflecting gold’s unique nature as a hybrid possessing characteristics of both a commodity and a safe-haven asset.

These initial characteristics confirm that the return data do not conform to a normal distribution, justifying the use of robust standard methodologies like GARCH models in subsequent analyses to accurately measure hedging effectiveness.

Before conducting any econometric analysis, it is necessary to test the stationarity of the time series used in the study (gold prices, US Dollar Index DXY, and returns of stock and bond indices) to avoid the problem of Spurious Regression, which occurs when there is a Common Trend in non-stationary data leading to high R ² values and significant t-statistics misleadingly even in the absence of any real relationship. ²¹

To achieve this goal, the common Unit Root Test, specifically the Augmented Dickey-Fuller Test (ADF), was used. The ADF test examines the null hypothesis (H ₀) that the time series contains a unit root (i.e., it is non-stationary), against the alternative hypothesis (H ₁) that the series is stationary.

The test was applied to the levels of the time series and then to their first differences. The ADF test equation used in this study is: Δ Y t = ∝ + βT + r y t − 1 + ∑ δ i Δ γ t − i + € t

Where: •

(Y _t) represents the time series under test.

Expected Results: It is theoretically expected that the levels of the time series (gold prices, dollar, etc.) are non-stationary (I(1)), meaning they contain a unit root at the level but become stationary after taking the first difference (I(0)). This stability in the first differences will allow us to proceed with regression models and analysis without the risk of spurious results, and will pave the way for Cointegration tests in case a set of non-stationary variables are found to move together in the long term.

This analysis aims to measure the strength and direction of the linear relationship between the daily or monthly returns of gold and the returns of each of the following: 1.

The US Dollar Index (DXY).

This will help provide an initial picture of gold’s role as a hedging tool: •

If the correlation with the dollar is negative and strong: This reinforces the hypothesis of it being an effective hedge against the risk of a dollar decline.

Statistical Methodology: The Pearson Correlation Coefficient will be calculated for the following periods: •

The overall study period: To measure the general relationship.

Expected Results (Based on Literature): 1.

Gold vs. US Dollar (USD): The correlation analysis is expected to show a strong negative and statistically significant correlation coefficient, especially during the overall periods. This aligns with the theory that a decline in the dollar’s value drives investors towards gold as an alternative to fiat currencies, raising its price.

This applied part of the research aims to measure and evaluate the optimal quantity of gold that an international investor should hold to reduce their portfolio risk (associated with dollar fluctuations and systemic crises), and to measure the degree of gold’s success in achieving this goal (hedge effectiveness).

1. Proposed Statistical Methodology:

To achieve this goal, the research proposes using the Dynamic Conditional Correlation Generalized Autoregressive Conditional Heteroskedasticity (DCC-GARCH) model, a standard econometric model in the financial literature for this type of study, for the following reasons: •

It allows for measuring the dynamic conditional correlation between gold returns and the returns of other assets (such as the S&P 500 index, or US Treasury bonds). This is important because the strength of the relationship between gold and other assets changes over time, especially during crisis periods.

Formula for Optimal Hedge Ratios:

Based on the DCC-GARCH model, the optimal hedge ratio (HR) at time (t) between gold (Asset 2) and the risky asset (Asset 1, such as a dollar-denominated stock index) is calculated using the following formula: H R t = h 12 , t h 22 , t

Where: •

ℎ ₁₂, _t: The conditional covariance between the returns of Asset 1 and gold (return 2) at time (t).

HR _t indicates the amount of short position (sale) required in gold to hedge one unit of long position (purchase) in the risky asset.

Formula for Hedge Effectiveness:

The effectiveness of the hedging strategy is measured by comparing the volatility of the hedged portfolio versus the unhedged portfolio. The common formula, inspired by, ²² is: HE = 1 − [ Variance of Hedged Portfolio Returns ] / [ Variance of Unhedged Portfolio Returns ]

The HE value is interpreted as the percentage reduction in variance (risk) achieved by using the hedging strategy. The higher the HE value, the greater the hedge effectiveness.

2. Application of Models to Research Scenarios:

The above model will be applied to three cases: •

Hedging against Dollar Risk: Hedge ratios and their effectiveness will be calculated for a portfolio consisting of a basket of international stocks (denominated in dollars) against gold.

3. Expected Results (Based on Literature): In line with recent literature, the results are expected to show the following: •

Optimal hedge ratios for gold increase significantly during systemic crisis periods, indicating the need for larger quantities of gold for effective hedging when risks escalate.

This section aims to quantitatively test the hypotheses presented in the introduction and discuss their economic implications in light of the literature and theories reviewed in Chapter Two.

First: Testing Hypotheses 1.

Hypothesis One: “Gold acts as an effective hedging tool against the risk of a decline in the value of the US dollar in the long run.”

Second: Discussing Results in Light of the Theoretical Framework •

In Light of Modern Portfolio Theory: The results confirm that including gold in a diversified international portfolio improves the risk-return ratio, not through its positive correlation with other assets, but through its lack of correlation or negative correlation during periods of stress, which reduces the overall volatility of the portfolio.

The study’s results confirmed the effectiveness of gold as a dual hedging tool: against US dollar fluctuations, and as a safe haven during systemic crises. The inverse relationship between gold and the dollar was clearly evident in the long run, while gold’s role as a safe haven was stronger during financial and geopolitical crises compared to pandemic crises. Dynamic hedging models (DCC-GARCH) also showed that the optimal hedge ratio and hedge effectiveness increase significantly during periods of market stress, supporting gold’s exceptional role in managing international portfolio risks.

The results of this study are consistent with most of the previous literature, such as: •

Baur & Lucey (2010) ² and Beckmann et al. ⁴ in confirming gold’s role as a hedge against the dollar.

This study also added a fine distinction between types of crises, as gold showed stronger hedging performance during financial and geopolitical crises compared to pandemic crises, which partially agrees with the results of Ciner et al. ²⁴ regarding the varying response of assets depending on the nature of the shock.

5.3.1. Recommendations for international investors and portfolio managers •

Include gold at a rate ranging between 5% and 10% in international portfolios to improve the risk-return balance.

5.3.2. Recommendations for policymakers

Innovative gold-based investment tools (such as actively managed ETFs) can be developed to meet hedging needs. It is also essential to encourage transparency in gold markets and enhance the infrastructure for secure and smooth trading. The role of gold in the international reserves of countries, especially those exposed to currency risks and external crises, should also be considered.

5.3.3. Recommendations for future research

Future studies should conduct a comparative study of the effectiveness of gold versus emerging hedging assets like digital currencies (Bitcoin). The scope of analysis should also be expanded to include more diverse crises, such as climate crises or energy crises. Artificial intelligence and machine learning techniques should be used to model gold’s behavior in complex economic contexts.