Gold's Value as an Investment
For investors, gold is an asset without a yield that is attractive in times of low and negative real interest rates. Gold also has an embedded put option because investors can sell it to those who value its use as jewelry or as a productive input. This paper presents an approach for pricing gold from investors' perspective. The model is based on no-arbitrage principles with minimal structural assumptions. There is no need to specify investor preferences. When fitted to match 10-year real US Treasury rates the model can replicate the salient fluctuations in the time series of gold prices since 2007. The model is also able to capture key patterns of CME Comex gold futures prices from about 1990 onwards. The model implies that the majority of the value of gold is due to its role as an investment asset.
I am grateful for comments from Greg Duffee, Dirk Krueger, Leonid Kogan, Daniel Andrei, Bob McDonald, seminar participants at Hong Kong University, McGilll, Surrey, the Bank for International Settlements, Kellogg, Purdue, Peking University HSBC and for research assistance from Yoshiki Ando. The most recent version of this paper is available at http://finance.wharton.upenn.edu/~jermann/. Email: firstname.lastname@example.org. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.