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 ). 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.
Two important items in the news today:First, Bloomberg reports that retails sales fell 2.1% in September – the biggest decrease this year.Know what that means? It means the “Age of Thrift” is here…and that consumers really are cutting back – just like we said they would.And it means that the consumer economy is not going […]
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.
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.
After the 2008 financial crisis, little could be heard over the deafening cries of "mission accomplished." And while the Fed's massive QE program seemed to work, the question remains: for how long? Addison Wiggin explains why the next round of QE will fail miserably, paving the way for the IMF to step in with something called "special drawing rights." Read on...
Despite what you hear in the mainstream news, the commercial market for small drones could eventually dwarf the military one. In fact, it’s already happening. This is a big market, and it's getting bigger by the day. Today, Wayne Mulligan explains how to get in on the ground floor. Read on...
While a traditional "buy and hold" investment strategy can be a good way to make money in the long run, it's by no means the only way. For those investors who dismiss technical trading as a "witchcraft" and impossible to figure out, Greg Guenthner has just two charts to show you that could completely alter how you feel about trading stock market trends. Read on...
American citizens aren't the only ones fleeing the country because they don't like the direction it's headed. Corporations expatriate for similar reasons. So why are companies desperate enough about corporate tax to leave the U.S., the champion of freedom and enterprise? Clem Chambers explains here...
Milton Friedman is roundly regarded as one of the great economists of the 20th century. But his view of the Bretton Woods system was all wrong. And the current mess of floating exchange rates proves that. Today, Lewis Lehrman explains how the current monetary system pits every country against each other in a financial "race to the bottom"...