Determining the role of precious metals in financial markets: An empirical application on developed and developing economies

Precious metals emerging as an alternative to financial investment instruments available in financial markets have managed to attract the attention of investors by continuing to rise towards the top in recent years. Precious metals that used in place of money in the past, take part in portfolio diversification by considering factors as hedging against to macroeconomic risks and safe haven due to the uncertainties and turmoils occuring in the financial markets today. This study examines effect of an important investment tool as of today, precious metals on conventional and Islamic stock markets of developed and emerging countries. In this context, optimal portfolios have been created in terms of investment strategy. Maki cointegration test was used to examine the relationship between the said assets and the markets. With the obtained results, covariance matrices were established and the weights, standard deviations and returns of the portfolios were made using the Solver add-on of Excel. Portfolio optimization was made according to the Markowitz model, based on the existence of a long-term relationship between precious metals and traditional and Islamic stock markets between in 2002-2019. Three different investor type targets were selected in order to make clear of the results of analysis. It has been revealed that Islamic stock markets of emerging countries perform as the most advantageous investment tool for type 1 and type 2 investors that invest in stock markets based on precious metal prices. Islamic stock markets of developed countries have been found to be more advantageous for the third type of investors that want to invest in both the four precious metals and stock markets. Today, investors add precious metals to their portfolios as a safe haven or hedging tool, especially in times of crisis. As a result of the study, it has been proven that gold, rather than silver, platinum and palladium, always serves as a safe haven for developed and emerging countries for both individual and institutional investors for diversify their portfolio in international financial markets. Accordingly to this, gold can generally be used as an effective portfolio diversification tool in financial markets.