Returns of Gold and Gold-Mine Shares
David Brown, Indiana University

The project paper (co-authored with Scott Hoover) argues that since gold mines are options on the price of gold, gold mine stock returns should have option-like properties. The authors develop and estimate a pricing model for gold stocks and for gold stock portfolios. The results suggest confirm that gold stock returns are useful for forecasting gold volatility. They also show that gold mine stock returns lead gold returns. Finally, they show that gold mine stocks are a poor substitute for gold in broadly diversified portfolios. (The correlation between gold and gold stocks is low.) The results are important because they identify option characteristics of equity. All equities, in principal, have these characteristics. They are most easily found in gold because of the special nature of the underlying production technology. The results have application to other extraction stocks, and, to some extent, to stocks of bankrupt and near bankrupt companies. (Accepted Fall 1996.)