Hedging Foreign Exchange Risks with Gold: EGARCH Approach

This work presents an investigation on whether investments in Gold can serve as a hedge against the depreciation in currencies. The long term relationship between Gold price and the Japanese Yen per US Dollar, British Pound per US Dollar and South African Rand per US Dollar exchange rate was investigated using monthly data on Gold price and the three Dollar exchange rates. Results from the AR(2) and the EGARCH(1,2) models suggests that there is a typical inverse relationship between Gold price and the three exchange rates. This relationship differed among the three currencies. The strongest relationship was observed in the British Pound exchange rate, making the Pound the strongest hedge among the three considered currencies.