Safe Haven Currency or Pet Rock? Gold and the Variance Risk Premium

Abstract

This paper examines the forecasting power of the S&P 500’s difference between implied and realized variation, or the variance risk premium, on excess returns in the gold market. We find nontrivial predictability, with high (low) premia predicting low (high) future returns. The degree of return predictability peaks for gold futures contracts at the quarter horizon, where it overshadows that afforded by other traditional predictor variables such as the Consumer Price Index, the P/E ratio, and the consumption-wealth ratio. Furthermore, the variance risk premium’s general relationships with gold and with the stock market are inverses. No other commodities display such behavior, which is consistent with the notion of gold as a unique safe haven asset.