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The Price of Gold: A Global Required Yield Theory

Christophe Faugere () and Julian Van Erlach
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Julian Van Erlach: Nexxus Financial Technologies

Finance from University Library of Munich, Germany

Abstract: 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 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. (search for similar items in EconPapers)
JEL-codes: G (search for similar items in EconPapers)
Pages: 29 pages
Date: 2004-03-22
New Economics Papers: this item is included in nep-his, nep-ifn and nep-rmg
Note: Type of Document - pdf; pages: 29
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