Using The Hotelling Valuation Principle To Value Developed Gold Reserves

It is hypothesized that the Hotelling valuation principle (HVP) can determine the value of developed gold reserves using simple methods and easily obtainable data. This paper reports the results of an empirical test of this hypothesis. The model for the HVP is given by [V R=Cp-0(1) or V - CP-0' R(2)] where p = current spot price of gold per oz, [c] = average extraction cost of gold per oz, V = current market value of the gold in the ground (dollars) and R = gold reserves (oz). Using publicly available data from North American gold companies, we obtained data for V, R, p and c, and we ran a simple linear regression using Eq. (1) as the definition of the dependent and explanatory variables. By examining the value of the coefficients of the resulting regression equation, we can draw conclusions as to whether or not the HVP can be confidently used as an estimator of the value of developed gold reserves.