Rocky Vega

Predicting the price of gold in the future has always been more art than science. Stocks, bonds, and other investments are generally valued based on their future cash flows, an attribute that gold simply doesn’t have. In fact, beyond taking note of macroeconomic principles and using historical trends as a guide there are few agreed upon techniques for understanding gold’s price movement.

In light of this, a research paper entitled, “The price of gold: a global required yield theory,” piqued the interest of Zero Hedge because it describes a scientifically accurate predictor of gold value. Below, we highlight several of the interesting concepts it chose to pull out.

This is an overview of the concept:

“In this paper, we offer a gold asset pricing theory that treats gold as a store of wealth. We demonstrate a theoretical and empirical link between gold price, inflation, and foreign exchange rates and the general valuation of the stock market.

“Our approach is based on a generalization of Required Yield Theory (Faugere-Van Erlach [2003]). Required Yield Theory explains the valuation of financial assets via investors’ general requirement to earn a minimum expected after-tax real return equal to long-term GDP/capita growth.

“We hold that since gold fulfills the unique function of a global store of value, its yield must vary inversely to the yield required by any financial asset class, thus providing a hedge in the case where such assets are losing value.

“Our theory explains about 88% of actual $USD gold prices and 92% of actual gold returns on a quarterly basis, including the peak prices of gold, over the 1979-2002 period.”

Here is an introduction to the Required Yield Theory:

“Hence, our theory postulates that movements in the global real price occur because of the precautionary demand for gold, which largely depends on changes in the inverse real P/E (or required yield) of other assets classes combined.

“A consequence of this postulate is that a decline in the value of the stock market index does not necessarily entail flight to gold when, for example, expected stock earnings are also falling to maintain a constant real P/E ratio.

“On the other hand, flight to gold will happen when stock market prices are dropping faster than expected earnings due to acceleration of inflation for example.”

The complete PDF of the recommended gold research report can be found here. For more details from Zero Hedge, including an excerpt on how well the theory applies to the gold market at the time the article was written, visit its coverage of a scientific theory on the fair value of gold.

You May Also Like:


Purchasing Power of US Assets Declines With the Dollar

Bill Bonner

Many a tear has to fall But it’s all, in the game “It’s All In the Game” – Music by Charles Dawes As far as we know, only one American vice president ever made a contribution to public life worth remembering. That was Charles Dawes, vice president under Calvin Coolidge. Mr. Dawes was a Chicago […]

Rocky Vega

Rocky Vega is publisher of Agora Financial International, where he advances the growth of Agora Financial publishing enterprises outside of the US. Previously, he was publisher of The Daily Reckoning, and founding publisher of both UrbanTurf and RFID Update -- which he ran from Brazil, Chile, and Puerto Rico -- as well as associate publisher of FierceFinance. Rocky has an honors MS from the Stockholm School of Economics and an honors BA from Harvard University, where he served on the board of directors for Let?s Go Publications, Harvard Student Agencies, and The Harvard Advocate.

  • http://barackobamaisyournewpresident.com/ jon

    really the only question is: are they making predictions with the system and demonstrating 88% accuracy?

    or are they modeling, and comparing the results to historical prices, and finding it would have been right about 88% of the time?

    those are vastly different kinds of predictors. the former is a philosopher’s stone. the latter is subject to oversampling.

Recent Articles

The Next Car You Buy Will Be an Electric Car

Stephen Petranek

Electric cars are proving to be far cheaper to operate than anyone could have guessed. In fact, many people are now just getting the equivalent of thousands of mpg to their electric cars. And that's presenting a unique profit opportunity. Stephen Petranek explains...


A Treasure Chest of “Secret” Buy Signals

Paul Mampilly

The world's most successful investors almost always think differently. That's nowhere more apparent than when you're trying to invest in health care. Today, Paul Mampilly - one of the world's top biotech analysts - reveals one "secret" for making money from a predictable cycle in the industry. Read on...


Natural Gas: How to Stay Warm (and Profit) This Winter Season

Greg Guenthner

Right now, the city of Buffalo, NY is covered in five feet of snow. And while that may be bad news for those poor folks, it could be good news for you. Because now that another harsh winter is upon us... you have a massive opportunity for quick double-digit gains. Greg Guenthner explains...


Tip of the Day
3 “Dirty” (and Sexy) Ways to Boost Your Health Tonight

Chris Campbell

Warning: The following article is not for the puritanical. Today, Chris Campbell shows you three "dirty" health boosters you can use tonight to raise your immune system... improve your outlook on life... and make your partner a happy camper. Read on...


The Shock Doctrine: When Order Trumps Personal Freedom

James Rickards

When some event - be it a terror attack, financial panic or natural disaster - upsets the status quo, people are more willing to relinquish their freedom in favor of a greater sense of security. And that's when ambitious political leaders make their move... And as Jim Rickards explains, another such event could be right around the corner. Read on...