A scenario-based thinking tool for the gold price
The model calculates nominal returns using the Fisher equation. Instead of the simple additive formula (nominal ≈ real + inflation), the exact multiplicative formula is used: (1 + nominal) = (1 + real) × (1 + inflation).
The difference between the two formulas is minimal when inflation is low. However, as inflation rises (e.g., to 15%), the additive formula produces inaccurate results because inflation also compounds the real premium. The multiplicative formula prevents this mathematical distortion.
This framework allows inflation and the real premium to be calculated separately and combined afterward. Inflation establishes the base price, while the real premium determines gold's position relative to this base. Keeping these components separate ensures transparency, making it clear which factor drives the price change across different scenarios. This structural framework was implemented because it is the most economically sound way to combine inflation and the real premium.