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Does gold act as a safe haven against exchange rate fluctuations? The case of Pakistan rupee

Saba Qureshi, Ijaz Ur Rehman and Fiza Qureshi

Journal of Policy Modeling, 2018, vol. 40, issue 4, 685-708

Abstract: Investors often look for a refuge to avoid undesirable exposures to risk during period of extreme downturns in currency returns. We investigate daily gold and rupee exchange rates depreciation against set of currencies over the period of 1992–2015. Using wavelets at multiple time horizons; we find that gold act as a consistent short run hedge against exchange rate hence validating the exchange rate destruction hypothesis. This finding is helpful for speculators in their decision making while taking long and short positions accordingly. This finding suggests that central bank also need to keep other safe haven assets in reserves because the hedging ability of gold is only limited to short run. Further, the role of gold in providing protection against currency risks is also confirmed using quantile regression. These results assist portfolio managers and governments in formulating effectual diversification strategy for preserving investment portfolio during extreme event condition. Our results also suggest that gold has a lead relationship with exchange rate; however, this relationship switches over specific time intervals. This finding is of major concern for policy makers in determining the extent of stabilization in gold prices to bring consistency to exchange rate. Finally, the Granger coherence coefficients confirm that the strength of the causal relationship varies across over all frequencies. These conclusions have important implications for policy makers, economic analysts, portfolio managers and institutional investors.

Keywords: Gold; Safe haven; Exchange rate destruction; Wavelets; Quantile regression (search for similar items in EconPapers)
JEL-codes: F3 F31 G1 G10 G15 G32 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:jpolmo:v:40:y:2018:i:4:p:685-708