While gold’s contribution to managing portfolio risk is well established, and supported by a large body of work devoted to its hedging characteristics,its contribution to portfolio return is not, said the gold’s long-term returns report released by WGC.
Frameworks for estimating gold’s long-term return exist but fall short of a robust approach that aligns with the capital market assumptions for other asset classes. This report sets out a framework, accounting for gold’s unique dual nature as a real good and a financial asset.
Publications tackling gold’s expected return have generally concluded that gold’s primary function is a store of value, implying a long-run co-movement of gold with the general price level (CPI). Alternative approaches using risk premia estimations or bond-like structures with embedded options produce similar results.
“Our simple yet robust approach – which we refer to as Gold Long-Term Expected Return or GLTER – uses the distribution of above-ground gold stocks analysed via different demand categories as a foundation and starting point,” the report adds.
The drivers of gold buyers across various demand segments – jewellery and technology fabrication, central banks, financial investment, retail bars and coins– are crucially broader and more important than existing theories suggest. In addition, although financial market investors tend to dictate price formation in the short term, they are less dominant in the long term.“We show that the gold price over long horizons is mainly driven by an economic component, proxied by global nominal GDP, coupled with afinancial component, proxied by the capitalisation of global stock and bond markets, that balances the overall relationship. Third-party inputs are then used to estimate long-term expected returns for gold,” the report adds.
