ISSN: 2225-8329
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This paper investigates the impact global economic policy uncertainty (GEPU) on gold prices employing time-series Granger mediation approach. Existing literature focused solely on examining the direct response of gold prices to changes in uncertainty, which omitted important information about the behavior of market participants in the gold market. We introduce investment gold demand as a mediating variable which provides an added dimension to understand how changes in GEPU get transmitted to the gold price. We use monthly net gold demand data of exchange traded funds (ETF) and physical retail investors to proxy for gold demand. The findings show that investors respond differently to GEPU developments, with ETF demand being the main transmission channel for changes in global uncertainty to the gold price. The result of full mediation effect for ETF demand implies that GEPU has no direct effect on gold prices; rather, its entire effect is indirect via ETF interventions. This is a crucial insight into understanding the price influence of this relatively new demand segment. We interpret its influence as safe haven seeking behavior of investors, highlighting gold’s safe haven function. We find no mediating role for retail demand, implying that physical gold investors are not responsive to global uncertainty. These findings suggest that the mediating effect is demand-category specific and reflect the behavior of the fundamentally different types of gold investors. The findings hold important implications for investors and policymakers.
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