34 Pages Posted: 22 Mar 2004
Date Written: September 2006
We construct a gold valuation theory based on viewing gold as a global real store of wealth. We show that the real price of gold varies inversely to the stock market P/E and thus is a direct function of a global yield required to achieve a constant real after-tax return equal to long-term global real GDP per-capita growth. We introduce a new exchange rate parity rule based on the equalization of inverse stock market P/Es (required yields) across nations. Foreign exchange affects the price of gold to the extent that required yields and Purchasing Power Parity equalizations do not take place across nations in the short run. A quarterly valuation model is constructed using concurrent economic data that is within 12% mean percentage tracking error from real U.S. gold prices from 1979- 2002. Several major world events have had a large but fleeting impact on gold prices.
Keywords: Gold Price, Stock Market, Required yield, Forward Earnings yield, Foreign Exchange, P/E, Price-Earnings Ratio.
JEL Classification: E44, G12
Suggested Citation: Suggested Citation
Faugère, Christophe and Van Erlach, Julian, The Price of Gold: A Global Required Yield Theory (September 2006). Available at SSRN: https://ssrn.com/abstract=520382 or http://dx.doi.org/10.2139/ssrn.520382