Published Paper Details:

This research explores the potential of gold (XAU) to serve as an early warning signal for extreme market events in the U.S. financial context, using Extreme Value Theory (EVT). Gold is widely recognized as a safe-haven asset, particularly during periods of heightened market volatility and systemic risk. This study employs monthly time series data on gold prices and the CBOE Volatility Index (VIX) spanning from 1997 onward to analyze the tail behavior of gold returns and their association with volatility shocks. Extreme Value Theory provides a statistical framework for assessing the probability and magnitude of unusually large or small outcomes (e.g., financial crashes, natural disasters, extreme rainfall). Unlike conventional statistical methods that model averages or typical behavior, EVT zooms in on outliers or tail events. Extreme Value Theory is applied using the Peak Over Threshold (POT) method to model both the upper and lower tails of gold returns. The upper tail, representing extreme positive returns, exhibits a bounded nature with a shape parameter (?) of -0.26, suggesting limited upside potential. Conversely, the lower tail displays a heavy-tailed distribution (? = 0.41), implying greater susceptibility to large losses. These findings are critical for understanding the asymmetric behavior of gold during market stress. Quantitative risk metrics derived from EVT--namely, Value at Risk (VaR) and Expected Shortfall (ES)--reveal that under a 1% tail probability, gold can experience gains of up to 11.9% or losses of up to 9%, with a conditional average loss (ES) of 3.3%. This demonstrates that while gold may provide a buffer in crisis periods, it is not immune to downside risk, particularly in high-volatility environments. The results underscore the importance of modeling tail risk in gold for investors, policymakers, and portfolio risk managers. The asymmetry in tail behavior further suggests that gold's role as a safe haven is nuanced and should be evaluated alongside market volatility indicators such as VIX. This study contributes to the growing body of literature on financial tail risk management and positions gold as a conditional signal rather than an absolute shield against market distress.