The World Gold Council has released a comprehensive report titled Gold’s Long-Term Expected Return (GLTER), which introduces a new framework for evaluating the long-term return potential of gold. While gold’s role in hedging portfolio risk is widely recognised, the report argues that its contribution to portfolio return has often been underestimated or misunderstood. Existing models tend to align gold’s return with inflation or consider it a store of value. However, the GLTER report provides a fresh perspective, showing that gold’s real return has outpaced inflation and is closely correlated with global GDP growth over the past 50 years.
The report highlights two critical misconceptions in previous analyses. First, it notes that using data from the Gold Standard era to assess gold’s performance leads to flawed conclusions, as gold’s price was heavily regulated during that period. Second, the report criticises the tendency to view gold solely through the lens of financial market demand, ignoring other significant drivers such as jewellery, technology, and central bank demand. These broader demand categories are essential for understanding gold’s real value and return potential.
The GLTER framework offers a more nuanced understanding of gold’s long-term performance by considering both its economic and financial characteristics. The economic component is proxied by global nominal GDP, while the financial component is represented by the capitalisation of global stock and bond markets. The report’s findings suggest that gold’s price over long time horizons is mainly driven by economic expansion, with financial markets playing a secondary role in balancing this relationship.
The GLTER model predicts that gold’s expected long-term return will continue to exceed inflation, driven by global GDP growth. The report’s approach challenges the traditional view that gold’s expected real return ranges between 0% and 1%. Instead, it argues that gold’s return over the next decade could be influenced more by economic growth than previously anticipated, with an annual expected return of around 5.2%.