The Price of Gold

Abstract

A gold valuation theory based on viewing gold as a global real store of wealth shows that the real price of gold varies inversely with the stock market P/E. The price 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. 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 constructed using concurrent economic data yields prices that track real U.S. gold prices over 1979–2002 within 12% of tracking error. Prices are sometimes briefly impacted by major world events.

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