Connectedness between geopolitical risk, financial instability indices and precious metals markets: Novel findings from Russia Ukraine conflict perspective

Precious metals and traditional energy prices are shaken by geopolitical tension, financial instability, rising inflation, declining economic growth, and financial markets. In addition, conventional energy, such as oil and gas, are intensive inputs to metal production, making these variables increasingly interconnected for economies and financial investment. This study analyzes the dynamics of the connectedness generated by economic instability and geopolitical risk on the traditional non-renewable energy and precious metals markets using TimeVarying Parameter Vector Autoregressive (TVP-VAR) and Wavelets Coherences from 11 June 2012 to 23 May 2022. The results show that the total connectedness index was higher during the Russia-Ukrainian conflict in February-May 2022. Moreover, the geopolitical risk, financial instability, and oil return are net transmitters of shocks, while gold, gas, and silver are the net received. The wavelet coherence results show strong co-movement during the Russia-Ukrainian conflict between geopolitical risk, oil, gas, and silver returns at various scales, given its properties for diversification at the time-frequency domain. Gold appears a stable asset and serves as a haven ability against geopolitical risk and financial instability. Findings indicate that geopolitical risk and financial instability are crucial in determining metals, precious, and energy markets that the investors, managers, funds, and producers need to consider in their investment and production decisions. Policymakers and macroprudential authorities should consider a shifting macroeconomic environment.

Automated summary

This study analyzes the impact of economic instability and geopolitical risk on traditional non-renewable energy and precious metals markets. The results show a higher level of connectedness during the Russia-Ukrainian conflict. Geopolitical risk, financial instability, and oil return are net transmitters of shocks, while gold, gas, and silver are net receivers. Gold serves as a stable asset and provides a hedge against geopolitical risk and financial instability. The findings highlight the importance of considering geopolitical risk and financial instability in investment and production decisions in metals, precious, and energy markets.