Precious metals and currency risk: testing hedging effectiveness and safe-haven properties across trading frequencies during periods of market distress

This paper reassesses the role of gold, silver, and palladium as hedging and safe-haven instruments against exchange rate risk, across both daily and intra-day frequencies. A novel, parsimonious testing framework is introduced to identify and model time-varying correlations between precious metals and currency returns, addressing common sources of overfitting and spurious dynamics in multivariate volatility modelling. Using data spanning key market stress episodes—such as the COVID-19 pandemic and the first phase of the Ukraine—the analysis examines the conditions under which precious metals provide effective hedges. The results highlight substantial heterogeneity across currencies and frequencies, with silver performing best at high frequencies and gold offering the most capital-efficient hedges for emerging markets during daily stress episodes. A newly added analysis quantifies the consequences of modelling spurious dynamic correlation, demonstrating that incorrect assumptions can significantly reduce hedging effectiveness. Findings yield stylized, empirically grounded recommendations for investors and policymakers seeking to manage currency risk using precious metals.