Knight in shining armor: Ambiguity and gold prices

Abstract

Knightian uncertainty, or ambiguity, posits that investors prefer known risks over unknown risks, a behavior referred to as ambiguity aversion. This study examines the influence of ambiguity on gold’s behavior as a safe-haven asset, focusing on its impact on the net convenience yield — a key measure of the intrinsic value of holding physical gold. Using a market-based measure of ambiguity rooted in the volatility of probabilities, the analysis finds a consistent and significant positive effect on gold’s convenience yield. The findings remain robust across alternative uncertainty measures, model specifications, and extended time periods, including an ambiguity measure derived from the US Dollar index and daily range spot gold data. This study underscores the superiority of the market-based ambiguity measure over traditional uncertainty proxies and highlights the role of ambiguity aversion in reinforcing gold’s safe-haven status during periods of heightened uncertainty.