Haven on Earth? Dynamic Connections between Gold and Stock Markets in Turbulent Times

We find that exogenous structural shocks caused by terrorist attacks, wars, political turmoil and gold market specific events have a strong role to play in the analysis of dynamic relationships between gold and stock market returns. Our main finding is that the interaction between the gold market and stock market is much tighter than previously observed. Especially some of the gold market specific shocks have long lasting impacts also on the financial markets. Also some events, which may have been miss-interpreted as minor shocks previously, have in fact had significant impacts on both stock and gold markets. Furthermore, the dynamic correlations between all the analyzed financial sectors increase prior to the crisis periods, but the correlation between the return on the VIX index and the change in the TED spread, which measures the relationship between price risk and credit risk, is the most promising early warning indicator of financial crisis.