Gold Prices , Exchange Rates , Gold Stocks and the Gold Premium

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. Goldmining firms have significant gold price exposure; the price of the average goldmining 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.