Why Gold Has a Real Return—and How to Value It

Abstract

Gold is shown to obtain a real return in terms of global purchasing power per troy ounce. Whereas fiat money obtains a negative return equal to the inflation rate (loss of purchasing power), which is directly related to the excess of money stock growth to real GDP, gold obtains a real yield due to inherent above-ground stock growth below the rate of world real GDP growth. This effect has historically been masked by measuring the price of gold in currencies that have appreciated and not in global purchasing power. A novel solution to the gold standard Gibson’s paradox proves that gold is valued according to its yield. Because gold obtains a real yield, its fiat money price is also a function of real interest rates, expected fiat inflation rate, and locally, the real global purchasing power of the domestic exchange rate.