GLTER Gold’s long-term expected return

Gold’s primary function is as a store of value: Report 

While gold’s contribution to managing portfolio risk is well established, supported by a large body of work devoted to its hedging characteristics, its contribution to portfolio return is not. 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, GLTER Gold’s long-term expected return, published by World Gold Council (WGC), sets out such 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 as 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.

And while existing research is rich in insight, two features frequently pop up that, in our view, mischaracterise gold and have led to biased conclusions; 1: Using data from periods during the Gold Standard to analyse gold’s performance paints a misleading relationship between gold and general prices.  

2: Viewing long-term price dynamics exclusively through the lens of demand from financial markets and ignoring other sources of demand, is a likely contributor to a systematic underweighting of gold in private portfolio allocations. 3: In most cases, these theories land on an expected long-run real return ranging between 0% and 1%.  

“We instead show that gold’s long-run return has been well above inflation for over 50 years (Figure 1), more closely mirroring global gross domestic product (GDP), and a proxy for the economic expansion driver used in our other gold pricing models. 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” said the Report.  

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 a financial component, proxied by the capitalisation of global stock and bond markets, which balances the overall relationship. Third-party inputs are then used to estimate long-term expected returns for gold” WGC.