Negative Shocks on the US Capital Market and the Rate of Return on Investments in Gold

Objective: The article examines how strong the sell-off on the capital market in the United States must be to cause above-average, positive rates of return on the gold investment market. The durability of such above-average gains in the gold market was also assessed. Research Design & Methods: The study was conducted using an event analysis for daily data from 3 January 1994 to 2 November 2022. The AAR and CAAR rates of return and the results for the adjusted Patell test were used to answer the research questions. The Standard & Poor’s 500 (S&P 500) and Dow Jones Industrial Average (DJ) indices as a representation of the capital market in the United States, LBMA spot prices for gold prices, and the Bloomberg Commodity Index, which served as a benchmark, were used for the study. Findings: The paper shows that drops in the S&P 500 and DJ indices, exceeding 3%, result in an immediate, i.e., on the same day and on the following day, above-average price increase on the gold market. The cumulative, above-average, positive and statistically significant rate of return for gold is maintained with such a size of decrease for up to 21 days from the day of the fall on the capital market. Falls on the capital market not exceeding 2%, however, are not a strong enough stimulus to cause above-average rates of return on the gold market. Implications / Recommendations: Investors should always buy gold on the event day, when the decline in the US capital market is bigger than 2.3%. As an event, we define the biggest declines in the US capital market. Buying gold on the day after the event depends on which US index declines. Buying gold and holding it for 21 days after a decline in the US market bigger than 3% is always profitable. Contribution: The current study sheds more light on the connections between capital and gold markets. It measures gold’s ability to serve as a safe haven asset in the context of the overreaction hypothesis. This hypothesis, derived from applied psychology, states that people tend to overreact to dramatic events and then make irrational decisions.