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The Price of Gold: A Global Required Yield Theory

  • Christophe Faugere

    (U at Albany)

  • Julian Van Erlach

    (Nexxus Financial Technologies)

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.

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Paper provided by EconWPA in its series Finance with number 0403003.

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Length: 29 pages
Date of creation: 22 Mar 2004
Date of revision:
Handle: RePEc:wpa:wuwpfi:0403003
Note: Type of Document - pdf; pages: 29
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  1. Barsky, Robert B & Summers, Lawrence H, 1988. "Gibson's Paradox and the Gold Standard," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 528-50, June.
  2. Dipak Ghosh & Eric Levin & Robert E Wright & The Centre for Economic Policy Research, . "Gold as an Inflation Hedge?," Working Papers Series 96/10, University of Stirling, Division of Economics.
  3. Christophe Faugere & Julian Van Erlach, 2004. "A General Theory of Stock Market Valuation and Return," Finance 0403004, EconWPA, revised 17 May 2004.
  4. Lant Pritchett, 1997. "Divergence, Big Time," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 3-17, Summer.
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