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Gold Prices, Exchange Rates, Gold Stocks and the Gold Premium
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Garry Twite
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Abstract
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This paper studies the exposure of the stock prices of Australian gold-mining
firms to changes in gold prices and the valuation effects of gold price
exposure. Gold-mining firms have significant gold price exposure; the price
of the average gold-mining stock moves 0.76% for each 1.00% change in
Australian-dollar-denominated gold prices. Evidence from the behaviour of
stock price sensitivities suggests that gold-mining firms can be
represented as a portfolio of gold assets and embedded real options.
Simple discounted cash flow models systematically underestimate the price
of gold stocks. The evidence suggests that the valuation error is due to
both the failure of discounted cash flow models to reflect managerial
flexibility that is embedded in the operation of gold mines and the
misuse of discounted cash flow techniques.
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Download this article.
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Keywords
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GOLD STOCKS; GOLD PRICE; REAL OPTIONS.
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Contact Details
Garry Twite
Australian Graduate School of Management
The University of New South Wales
Sydney NSW 2052
E-mail: gtwite@agsm.edu.au
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The author wishes to thank Doug Foster, Brad McBean, Kerry
Pattenden, Tom Smith and Justin Wood for their helpful
discussion and comments on this paper. This paper has
benefitted from the useful comments and suggestions provided by
seminar participants at the Australian Graduate School of
Management and the University of Melbourne.
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