Hostname: page-component-78c5997874-ndw9j Total loading time: 0 Render date: 2024-11-06T11:42:57.671Z Has data issue: false hasContentIssue false
  • English
  • Français

THE RELATIVE VALUATION OF GOLD

Published online by Cambridge University Press:  05 August 2019

Dirk G. Baur ,
Joscha Beckmann  and
Robert L. Czudaj
Dirk G. Baur
Affiliation:
University of Western Australia
Joscha Beckmann
Affiliation:
University of Greifswald
Robert L. Czudaj*
Affiliation:
Chemnitz University of Technology
*
Address correspondence to: Robert L. Czudaj, Department of Economics, Chair for Empirical Economics, Chemnitz University of Technology, D-09126 Chemnitz, Germany. e-mail: [email protected]. Phone: 49 371 531 31323. Fax: 49 371 531 831323.
Get access Rights & Permissions [Opens in a new window]

Abstract

Gold is a globally traded asset and held in large quantities by investors and central banks. Since there is no established model to assess whether the price of gold is overvalued or undervalued, we propose a relative valuation framework based on gold price ratios. This idea is not confined to gold but offers the foundation for relative valuation of a broad range of different assets or asset classes. We analyze gold prices relative to commodity prices, consumer prices, stock prices, dividend, and bond yields and find that the relative value of gold varies significantly over time. An analysis of the factors which drive these variations demonstrates that inflation expectations and uncertainty have a strong influence on gold ratios while macroeconomic fundamentals are less important. More specifically, a boost in confidence decreases the relative price of gold while heightened uncertainty increases the relative price of gold, which confirms the role of gold as a safe haven.

Keywords

GoldRelative ValuationGold–Silver RatioSafe Haven
Type
Articles
Information
Macroeconomic Dynamics , Volume 24 , Issue 6 , September 2020 , pp. 1346 - 1391
Copyright
© 2019 Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We thank two anonymous reviewers and the participants of the 5th International Symposium in Computational Economics and Finance (ISCEF), Paris/France, the 14th INFINITI Conference on International Finance, Dublin/Ireland, as well as the KLU Finance Meeting on Gold, Hamburg/Germany, for valuable comments and suggestions.

References

Baker, S. R., Bloom, N. and Davis, S. J. (2016) Measuring economic policy uncertainty. Quarterly Journal of Economics 131(4), 1593–1636.10.1093/qje/qjw024CrossRefGoogle Scholar
Batten, J. A., Ciner, C. and Lucey, B. M. (2014) On the economic determinants of the gold-inflation relation. Resources Policy 41, 101–101.10.1016/j.resourpol.2014.03.007CrossRefGoogle Scholar
Baur, D. G. (2011) Explanatory mining for gold: Contrasting evidence from simple and multiple regressions. Resources Policy 36, 265–265.CrossRefGoogle Scholar
Baur, D. G. and Lucey, B. M. (2010) Is gold a hedge or a safe haven? An analysis of stocks, bonds and gold. Financial Review 45, 217–217.10.1111/j.1540-6288.2010.00244.xCrossRefGoogle Scholar
Baur, D. G., Beckmann, J. and Czudaj, R. (2016) A melting pot – Gold price forecasts under model and parameter uncertainty. International Review of Financial Analysis 48, 282–282.10.1016/j.irfa.2016.10.010CrossRefGoogle Scholar
Beckmann, J. and Czudaj, R. (2013a) Gold as an inflation hedge in a time-varying coefficient framework. North American Journal of Economics and Finance 24, 208–222.CrossRefGoogle Scholar
Beckmann, J. and Czudaj, R. (2013b) Oil and gold price dynamics in a multivariate cointegration framework. International Economics and Economic Policy 10(3), 453–468.10.1007/s10368-013-0237-8CrossRefGoogle Scholar
Beckmann, J., Berger, T. and Czudaj, R. (2015) Does gold act as a hedge or a safe haven for stocks? A smooth transition approach. Economic Modelling 48, 16–16.10.1016/j.econmod.2014.10.044CrossRefGoogle Scholar
Bialkowski, J. P., Bohl, M. T., Stephan, P. M. and Wisniewski, T. P. (2015) The gold price in times of crisis. International Review of Financial Analysis 41, 329–329.10.1016/j.irfa.2014.07.001CrossRefGoogle Scholar
Blose, L. E. (2010) Gold prices, cost of carry, and expected inflation. Journal of Economics and Business 62(1), 35–47.10.1016/j.jeconbus.2009.07.001CrossRefGoogle Scholar
Campbell, J. Y. and Cochrane, J. (1999) Force of habit: A consumption-based explanation of aggregate stock Market Behavior. Journal of Political Economy 107(2), 205–251.10.1086/250059CrossRefGoogle Scholar
Campbell, J. Y. and Shiller, R. J. (1998) Valuation ratios and the long-run stock market outlook. Journal of Portfolio Management 24(2), 11–26.CrossRefGoogle Scholar
Campbell, J. Y. and Shiller, R. J. (2001) Valuation Ratios and the Long-run Stock Market Outlook: An Update. NBER Working Paper, No. 8221.CrossRefGoogle Scholar
Capie, F., Mills, T. C. and Wood, G. (2005) Gold as a hedge against the dollar. Journal of International Financial Markets, Institutions and Money 15(4), 343–352.10.1016/j.intfin.2004.07.002CrossRefGoogle Scholar
Chauvet, M. (1998) An economic characterization of business cycle dynamics with factor structure and regime switching. International Economic Review 39, 969–969.10.2307/2527348CrossRefGoogle Scholar
Cochrane, J. (2017) Macro-finance. Review of Finance 21(3), 945–985.10.1093/rof/rfx010CrossRefGoogle Scholar
Escribano, A. and Granger, C. (1998) Investigating the relationship between gold and silver prices. Journal of Forecasting 17, 81–81.3.0.CO;2-B>CrossRefGoogle Scholar
Faugere, C. and Van Erlach, J. (2005) The price of gold: A global required yield theory. Journal of Investing 14, 99–99.CrossRefGoogle Scholar
Jastram, R. W. (2009) The Golden constant: The English and American Experience 1560–2007. In: Leyland, Jill (ed.), Cheltenham: Edward Elgar.Google Scholar
Jones, A. T. and Sackley, W. H. (2016) An uncertain suggestion for gold-pricing models: The effect of economic policy uncertainty on gold prices. Journal of Economics and Finance 40(2), 367–379.CrossRefGoogle Scholar
Jurado, K., Ludvigson, S. C. and Ng, S. (2015) Measuring uncertainty. American Economic Review 105(3), 1177–1216.CrossRefGoogle Scholar
Kilian, L. (2009) Not all oil price shocks are alike: Disentangling demand and supply shocks in the crude oil market. American Economic Review 19, 1053–1053.CrossRefGoogle Scholar
Ludvigson, S. C. and Ng, S. (2009) Macro factors in bond risk premia. Review of Financial Studies 22(12), 5027–5067.CrossRefGoogle Scholar
Ludvigson, S. C., Ma, S. and Ng, S. (2015) Uncertainty and Business Cycles: Exogenous Impulse or Endogenous Response? NBER Working Paper: No. 21803.Google Scholar
Menger, C. (1871) Principles of Economics. Auburn, Alabama: Ludwig von Mises Institute (2007).Google Scholar
Morley, J. (2016) Macro-finance linkages. Journal of Economic Surveys 30(4), 698–711.10.1111/joes.12108CrossRefGoogle Scholar
A., O’Connor F., Lucey, B. M., Batten, J. A. and Baur, D. G. (2015) The financial economics of gold – A survey. International Review of Financial Analysis 41, 186–186.Google Scholar
Perron, P. (2006) Dealing with structural breaks. Palgrave Handbook of Econometrics 1, 278–278.Google Scholar
Raftery, A. E. (1995) Bayesian model selection in social research. In: Marsden, P. V. (ed.), Sociological Methodology, pp. 111–163. Cambridge, MA: Blackwell Publishers.Google Scholar
Rossi, B. (2013) Exchange rate predictability. Journal of Economic Literature 51(4), 1063–1119.CrossRefGoogle Scholar
Stuart, A., Ord, K. and Arnold, S. (1998) Kendall’s Advanced Theory of Statistics, Vol.1: Distribution Theory. 6th ed.Hoboken, NJ: Wiley.Google Scholar
Wang, K.-M., Lee, Y.-M. and Nguyen Thi, T.-B. (2011) Time and place where gold acts as an inflation hedge: An application of long-run and short-run threshold model. Economic Modelling 28(3), 806–819.CrossRefGoogle Scholar