Working Paper: NBER ID: w31386
Authors: Urban Jermann
Abstract: 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.
Keywords: gold; investment; real interest rates; pricing model
JEL Codes: G12; G13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| real interest rates (E43) | price of gold (E39) |
| real interest rates (E43) | investor entry into gold market (G19) |
| investor entry into gold market (G19) | price of gold (E39) |
| utility of gold by users (L72) | price of gold (E39) |
| price of gold (E39) | investor behavior (G41) |