Gold-backed cryptocurrencies: A hedging tool against categorical and regional financial stress

Abstract

This study evaluates the potential of gold-backed cryptocurrencies, such as Tether Gold and PAX Gold, as a hedge and safe haven against global, regional, and categorical financial stresses. Hedge and safe haven properties of gold-backed cryptocurrencies are also compared with those of gold and Bitcoin. For the analyses, dynamic conditional correlation (DCC) and quantile coherency techniques are applied to daily data from February 2020 to March 2023. The results show that Tether Gold and PAX Gold are strong safe havens against the US and equity-valuation-related financial stress but weak safe havens against global financial stress. Tether Gold is a weak safe haven against credit-related financial stress as well. Tether Gold is a strong hedge against US financial stress but a weak hedge against aggregate financial stress of developed economies and that of emerging economies. In our sample, gold-backed cryptocurrencies usually outperform gold and Bitcoin as a hedge and safe haven against financial stresses. The Quantile coherency analysis shows that Tether Gold is a hedge against low to moderate financial stress and a safe haven against extreme financial stresses. These findings have important implications for investors, risk-managers and policy makers.