Do precious metals hedge against global supply chain uncertainty?

Abstract

In this paper, we investigate the extent to which precious metals can be used as a hedge from the perspective of global supply chain uncertainty (GSCU), which is significant for obtaining higher investment returns. This exploration uses the wavelet-based quantile-on-quantile regression (QQR) technique to identify the complex connection between GSCU and the price of precious metals (PMP). We find that GSCU has both positive and negative effects on PMP, which indicates that precious metals do not always hedge against global supply chain uncertainty, in contrast to the predictions of the theoretical model. This analysis considers multiple time scales, showing that severe GSCU can lead to a bull market in precious metals, but moderate GSCU may cause PMP to decline in the short term. However, extremely low GSCU might result in a bear market in precious metals, whereas moderate GSCU could also decrease PMP in the medium run. PMP could also be positively affected by moderate GSCU and it turns negative in the long term due to severe GSCU. A test of these results using the wavelet-based QQR technique reveals that they are robust. Because the global supply chain is strained and faces a potential crisis, our results have important implications for investment by individual investors, firms, countries, and regions.

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