The Impact of COVID-19 on Gold Price Volatility

Abstract

Purpose: This article investigates the implications of the spread of COVID-19 on gold spot prices. Design/Methodology/Approach: We use GARCH and GJR-GARCH models based on daily gold returns over the period 2012-2020 to analyze the impact of the coronavirus on the volatility of gold returns. Findings: We find a positive correlation between the increasing number of global coronavirus cases and increases in gold price. Using GARCH and GJR-GARCH models, we find a significant positive impact of COVID-19 on the conditional variance equation, indicating that the coronavirus may indeed increase the volatility of gold returns. This relates to the fact that the spread of the virus increases uncertainty with regard to the future of economic and financial markets, causing the demand for gold to increase and in turn pushing prices upwards, a trend which may be likely to continue until a vaccine or other treatments begin to stabilize the global economic outlook. Practical Implications: The issue of volatility is of significant concern to both investors and policymakers who base decisions on the relative stability of both individual financial markets and the world economy. Furthermore, volatility estimation is an essential factor in many models and has broad application to the market risk management practices of firms. Finally, understanding the volatility of the gold market is crucial for any analysis of current and future expectations regarding the risks associated with coronavirus which apply to global markets. Originality/Value: The lockdown restrictions which have been widely implemented across the globe to curb the spread of the virus have included travel prohibitions and border closures, stay-at-home and work-from-home orders, and extensive business closures, all causing immense fallout for the global economy. In the current study, we analyze for the first time the impact of the coronavirus on gold spot prices by examining their correlation with the number of cumulative global cases and daily new cases.