Gold Returns

49 Pages Posted: 2 Feb 2013 Last revised: 14 Feb 2013

See all articles by Robert J. Barro

Robert J. Barro

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Sanjay Misra

The Greatest Good

Multiple version iconThere are 2 versions of this paper

Date Written: February 2013

Abstract

From 1836 to 2011, the average real rate of price change for gold in the United States is 1.1% per year and the standard deviation is 13.1%, implying a one-standard-deviation confidence band for the mean of (0.1%, 2.1%). The covariances of gold's real rate of price change with consumption and GDP growth rates are small and statistically insignificantly different from zero. These negligible covariances suggest that gold's expected real rate of return--which includes an unobserved dividend yield--would be close to the risk-free rate, estimated to be around 1%. We study these properties within an asset-pricing model in which ordinary consumption and gold services are imperfect substitutes for the representative household. Disaster and other shocks impinge directly on consumption and GDP but not on stocks of gold. With a high elasticity of substitution between gold services and ordinary consumption, the model can generate a mean real rate of price change within the (0.1%, 2.1%) confidence band along with a small risk premium for gold. In this scenario, the bulk of gold's expected return corresponds to the unobserved dividend yield (the implicit rental income from holding gold) and only a small part comprises expected real price appreciation. Nevertheless, the uncertainty in gold returns is concentrated in the price-change component. The model can explain the time-varying volatility of real gold prices if preference shocks for gold services are small under the classical gold standard but large in other periods particularly because of shifting monetary roles for gold.

Suggested Citation

Barro, Robert J. and Misra, Sanjay, Gold Returns (February 2013). NBER Working Paper No. w18759, Available at SSRN: https://ssrn.com/abstract=2210778

Robert J. Barro (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-495-3203 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Sanjay Misra

The Greatest Good ( email )

227 West Monroe Street
Suite 4900
Chicago, IL 60606
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
80
Abstract Views
1,305
rank
338,151
PlumX Metrics