Energy Market Uncertainties and Gold Return Volatility: A GARCH-MIDAS Approach

In this study, we use the GARCH-MIDAS model to evaluate how predictable oil and energy market uncertainties are in relation to gold return volatility. We examine daily gold returns and monthly energy uncertainty measurements such as Oil Market Uncertainty (OMU) and Oil Price Uncertainty (OPU), as well as measurements of energy market uncertainties such as the Global Equally-Weighted Energy Uncertainty Index (GEUI-EQ), GDP-Weighted Global Energy Uncertainty Index (GEUI-GDP), and country-specific energy uncertainty indexes for twenty-eight countries. We calculate the total connectedness index (TCI) for the country-specific indexes as a measure of the composite energy uncertainty index. We find that higher uncertainties in the oil and energy markets lead to increased gold volatilities, suggesting that gold can serve as a reliable hedge against oil and energy market uncertainties. Enhanced trading in the gold market raises its volatility as oil and energy market uncertainties increase. Our analysis, both within the sample and out-of-sample, supports this conclusion, and our findings remain valid even when alternative measures of oil and energy market uncertainties are considered. We provide valuable insights into the practical implications of our findings for both practitioners and policymakers.