This study evaluates the use of futures contracts for precious
metals to hedge against stock market risks and their hedging
effectiveness on the Indonesian Stock Exchange (IDX) and the Kuala
Lumpur Stock Exchange (KLSE). This study found that gold was the most
effective hedging instrument, since it produced the highest hedging
effectiveness both on the IDX and the KLSE among the other precious
metals. None of the hedged portfolios had a higher Sharpe’s ratio than
the unhedged one on the IDX; however, all the hedged portfolios on the
KLSE had a higher Sharpe’s ratio than the unhedged ones. Almost all the
hedged portfolios could produce a higher Treynor’s ratio than the
unhedged portfolios, both on the IDX and the KLSE. In general, this
study concluded that studying some precious metals could reduce the
investment risk, which was shown through the variance produced by the
smaller portfolios, while gold can improve the risk-adjusted
performance.