Predicting the Equity Premium with the Demand for Gold Coins and Bars

Abstract

In this paper, we propose novel predictor variables for forecasting stock market returns. We investigate the predictive power of the demand for gold coins and bars as a proxy for the risk premium consistent with the safe haven property of gold. The gold demand variables reflect the behaviour of retail investors and thus also represent a new class of predictors. Our analysis shows that the demand for gold is positively correlated with future stock returns and enhances the predictive power of the dividend yield and other variables.

Keywords: equity premium, stock returns, gold, gold coins, dividend yield, predictive regressions

JEL Classification: G12, G15