A building block approach for expected gold returns

17 October, 2024

We convert our findings into a framework that is perhaps more accessible to investors: the building block approach used widely by practitioners assessing long-term capital market assumptions.

Gold’s price relationship with GDP and the global portfolio can be extended to represent a relationship in return terms. This converts and simplifies these level components into the following relationship:

where rg are annual gold returns, GDP growth is annual global nominal GDP growth and global portfolio growth reflects the growth in market capitalisation of equities and bonds, both in US dollars.

Our analysis suggests that gold’s long-term expected returns are explained by three parts global nominal GDP growth less one-part global portfolio growth.

In Table 2 we use the results of Model (2) to predict an 8.6% annual average return for the period 1971–2024, versus an actual return of 8% over that period. Using external forward estimates for GDP growth and the global portfolio, the model predicts an annual average return of 5.2% for the next 15 years.

Table 2: Gold’s return will be influenced by future expected growth

Historical and modelled gold annualised returns*

Variable Nominal GDP Global portfolio Forecast gold return Actual return
Coefficient 2.837 -1.079 - -
1971-2023 7.00% 10.40% = 8.6% = 8%
2025-2040 5.24% 8.98% = 5.2% -

*Data from 1971 to 2023. Modelled return as described in Table 1. CPI forecast from J.P. Morgan LTCMA 2024. Assuming forecast horizon of 10-15 years. Expected GDP growth from Oxford Economics Global Scenario service baseline forecast. Equity and bond returns from J.P. Morgan LTCMA 2024 using AC World equities and World Government bonds respectively. Growth in outstanding shares and bonds calculated using 5-year average issuance.
Source: Bloomberg, BIS, Federal Reserve Bank of St Louis, LBMA Gold Price PM, WFE, World Gold Council. See Appendix A for data descriptions.

The estimated average gold return over the 2025-2040 period in excess of 5% per year is well above that produced by most other models (Figure 3). Specifically, the estimate exceeds common long-term return assumptions such as a zero real return (2.5% nominal in line with expected CPI inflation) over the next 15 years,1 or a gold return equivalent to the risk-free rate (2.9% for short-term US Treasury bills).

This is lower than the historical return we’ve observed, largely down to a lower expected growth in global GDP. However, all asset returns are likely to be impacted. For example, estimates for intermediate US Treasury bonds and World government bonds over the same period are 3.9% and 4.8%, respectively (see Appendix E). And US large cap stocks are expected to grow at a 7% annual rate – below their 20-year return.

This is lower than the historical return we’ve observed, largely down to lower expected growth in global GDP. However, all asset returns are likely to be impacted.

Figure 3: Asset class building blocks

building blocks graphic

Source: J.P. Morgan, Morgan Stanley, World Gold Council. See Appendix A for data descriptions.


<< Previous: The long term system

Next: Conclusion >>

Footnotes

  1. J.P.Morgan LTCMA 2024.

Important disclaimers and disclosures [+]Important disclaimers and disclosures [-]