Commodity Prices, Discount Rates, and Expected Dividend Growth

Abstract

While industry investors view gold as a hedging asset, academic studies often find the opposite. We show that gold's hedging nature is masked behind expected economic fundamentals. Gold prices increase with expected stock market return mu_t and expected dividend growth rate g_t. In bad times, mu_t rises while g_t declines. It may seem that gold prices fall in bad times and gold prices insignificantly or even negatively (positively) predict (correlate with) stock returns. The level and slope principal components, which explain 79% and 9% of major commodity price variation, can be largely interpreted as g_t and mu_t.

Keywords: Gold, Commodities, Hedging Assets, Expected Returns, Expected Dividend Growth