Does political risk matter for gold market fluctuations? A structural VAR analysis

As the preferred investment tool of global investors, the price movements of gold are increasingly attracting attention. This study explores the factors influencing the gold market with particular attention to the effects of political risk. Our results indicate that gold is a weak hedge against political risk, and this weak hedge has time-lag effects. Compared with macroeconomic factors, financial speculation has greater explanatory power for changes in gold returns as international speculative forces have become increasingly active. Furthermore, the exchange rate and interest rate contribute less to gold returns and are negatively correlated with gold returns. Regarding the effects of the subcomponents of political risk, external conflicts have the strongest explanatory power on gold market fluctuations. These findings derive important recommendations for both investors and risk managers in the gold market.