Study shows how macroeconomic and geopolitical news impact gold returns and volatility

March 9, 2023

Research by scholars from University of Derby, UK and King Abdulaziz University, Saudi Arabia leverage Sentiment analytics by RavenPack to asses impact of news on gold.

Global News on Gold Performance image

During recessions or amid fears of economic decline, investors prefer safe-haven assets, such as gold. Geopolitical conflicts and inflation can also fuel demand for gold. What other less prominent factors influence gold performance?

Researchers Nicholas Apergis (University of Derby, UK) along with Tasawar Hayat and Tareq (King Abdulaziz University in Saudi Arabia) wanted to explore how informational sentiment (a particular attitude conveyed by a text, which can be positive, negative or neutral to various degrees) affects gold prices.

In their paper published in 2021, “The role of macroeconomic and geopolitical news on gold returns and volatility” , they used sentiment analysis provided by RavenPack for certain macroeconomic and geopolitical global news, along with a GARCH modeling approach - a statistical modeling technique that helps predict the volatility of returns on financial assets.

More precisely, the analysis uses news sentiment indexes based on RavenPack News Analytics which captures news ranging from political events, natural disasters, wars and conflicts, to the release of important macroeconomic indicators and forecasts. The study is based on 18 years worth of news stories from the RavenPack archive and their corresponding Event Sentiment Scores and Relevance Scores , from January 1, 2000 through December 31, 2018.

“The findings provide strong evidence that both the overall macroeconomic and geopolitical news factors exert a significant negative impact on mean gold returns, while the results of the conditional volatility equation also document that both types of news have a negative and statistically significant effect on the volatility of gold returns” write the authors.

Moreover, the researchers wanted to exclude any possible influence of the global financial crisis, so as a next step, their analysis excluded the crisis period from February 2007 to August 2009. The results show similar results (see table 1). With one caveat - in terms of the relative impact on gold returns and their volatility, the impact came mainly from the geopolitical news factor.

Mean Equation P-Values
Constant 0.045 [0.26]
Gold Returns (-1) 0.724*** [0.00]
Macroeconomic Risks -10.772*** [0.00]
Geopolitical Risks -22.153*** [0.00]
Wald F-test [0.00]
Conditional Volatility Equation
Constant 0.0039* [0.09]
h(-1) 0.516*** [0.00]
n 2 (-1) 0.305*** [0.00]
Macroeconomic Risks -1.514** [0.03]
Geopolitical Risk -4.006*** [0.00]
Wald F-test [0.00]
Log-likelihood 3,725.7
LM test for Heteroscedasticity [0.61]

The analysis also looks at specific components of the macroeconomic and geopolitical news (see table 2). Findings indicate that, when it comes to geopolitical news, it is war and conflicts, as well as natural disasters that inflict on both gold returns and their volatility.

When it comes to macroeconomic news, topics such as sovereign debt, credit ratings, foreign exchange, interest rates, Treasury yields, employment, recession and economic growth appear to have to the strongest impact on gold returns ( 1%), followed by consumer confidence and consumer credit (5%), retail sales, housing, private credit and Consumer Price Index (at 10%).

Mean Equation P-Values
Constant 0.016 [0.49]
Gold Returns (-1) 0.671*** [0.00]
Terrorism -0.371 [0.28]
War & Conflicts -11.175*** [0.00]
Civil unrest -0.281 [0.34]
Natural disasters -15.438*** [0.00]
Conditional Volatility Equation
Constant 0.0024 [0.13]
h(-1) 0.501*** [0.00]
n 2 (-1) 0.305*** [0.00]
Terrorism -0.193 [0.039]
War & Conflicts -3.964*** [0.00]
Civil unrest -0.084 [0.52]
Natural Disasters -4.549*** [0.00]
Log-likelihood 3,784.2
LM test for Heteroscedasticity [0.57]

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