The Effectiveness of Gold as a Hedging Tool against Dollar Risks and Systemic Crises in International Investment Portfolios

<ns3:p>Background International investment portfolio managers face persistent challenges from US dollar exchange rate fluctuations and systemic crises, which undermine traditional diversification strategies. Gold is historically regarded as a potential safe haven, yet empirical evidence on its hedging effectiveness varies across different crisis contexts. Methods This study quantitatively assesses the effectiveness of gold as a hedging tool against US dollar risks and systemic crises. Using monthly data from January 2000 to December 2023, the analysis employs time series econometric techniques including cointegration tests, Autoregressive Distributed Lag (ARDL) models, and Dynamic Conditional Correlation Generalized Autoregressive Conditional Heteroskedasticity (DCC-GARCH) models. Gold returns are evaluated against the US Dollar Index (DXY), the S&amp;P 500, and global bond indices across normal market conditions and during distinct systemic crisis periods, including the 2008 global financial crisis, the COVID-19 pandemic, and geopolitical tensions in 2022. Results The findings confirm a statistically significant inverse long-term relationship between gold returns and the US Dollar Index, supporting gold’s role as an effective hedge against dollar depreciation. During systemic crises, gold demonstrates strong safe-haven properties, with optimal hedge ratios and hedge effectiveness increasing substantially during periods of market stress. The hedging performance of gold is particularly pronounced during financial and geopolitical crises compared to pandemic-related disruptions. Conclusions Gold serves as a dual hedging instrument, protecting international investment portfolios against both currency risk and systemic market shocks. The results suggest that strategic inclusion of gold, with dynamic weight adjustments during periods of elevated uncertainty, enhances portfolio risk-adjusted performance. These findings offer practical implications for portfolio managers and policymakers seeking to mitigate exposure to dollar volatility and systemic financial disruptions.</ns3:p>