8 graphs on gold price movements (86 years data)

January 25, 2012 92 comments

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Today I want to show you some patterns of gold prices from last few decades. There is no interpretation or conclusion but some findings and observations on gold price fluctuations in India. From last 10 yrs gold has been on a bull run and prices have multiplied many folds. In the last couple of weeks, gold prices have been extremely volatile and some analysts also predict that gold price upside movement is in threat. So I found gold prices for last 86 yrs (1925 2011) and did some number crunching and some graphs from which we get some interesting findings.

4 yrs Price difference (absolute returns

I found out the price difference for every 4 yrs period i.e. from 1928 to 1925 (yrs) and saw what exactly was the difference in the

prices, then 1929 1926 and so on till 2007-2011. Just to give you an idea, gold price in 2008 was 12,500 and in 2011 it was 26,400; so the price difference was 111.20%. I used these data to plot a running 4 yrs price difference so at any point of time you can see how much was the return in those 4 yrs prior to that point. Note that this change in absolute in difference. The major point to note is that majority people think that gold has performed outstanding post 2000 in a time frame of 4 yrs. But from the graph you can see that in 70s time the 4 yrs period return was much more than what investors saw in recent time.

8 yrs Absolute Price difference runnin

This one is just like above chart, but this time its 8 yrs price difference. We are trying to catch that was the price change in an 8 yrs period. So for example, price in year 1980 was Rs 1330, then after 8 yrs in 1987, the price was Rs 2570, which is a 93.23% So like this I calculated the price difference for all the 8 yrs period and graphed it. There are very less 8 yr holding period when the returns from gold was negative, that happened 50s and 60s and just 90s end.

4 yrs CAGR running

The next chart is the CAGR return chart for 4 yrs time frame and the graph is for running periods that means 1925-1928, 19261929 2008-2011. CAGR return is the main indicator of the performance of any instrument. If you look at the chart below you can see the ups and downs in gold performance and you can see how gold has performed in short run (4 yrs period) for a long time line. You can see that gold returns touched 20%-25% in 70s and even in recent time it has performed wonderfully which we all are aware of .

8 yrs CAGR running

Then you can see the graph below which shows CAGR return on 8 yr running period. The interesting a little obvious fact is that it hardly gave any negative return in any 8 yrs time frame, only during 50s and late 90s it has performed badly.

20 yrs CAGR running

The real test of gold comes from a very long term performance and if we see a 20 yrs CAGR return on rolling basis (1925 1944, 1926-1945 1992-2011), then you can see that most of the times the returns has been in the range of 5-10% and only in the 80s people got best return if they had bought it in 60s.

CAGR from 1926 (base year)

This chart is interesting; it calculates the CAGR return of GOLD from 1926 to all the years. I mean CAGR return from 1925- 1926, 1925-1927, 1925-1928 and then 1925-2011 So the base year is always 1925. This shows you what was the very long term CAGR return of gold considering it was bought in 1925. In a way this does not give us very strong conclusion, but still shows us some perspective.

CAGR from 1960 (base year)

This graph is same as above just that the base year taken was 1960 so considering gold was bought in 1960, the graph shows the CAGR return for different holding periods. You can see that apart from those who sold the gold in 80s realised the best CAGR return, but those who held it for long, still have the returns in range of below 10%.

CAGR from 1980 (base year)

The last chart I want to show is with base year of 1980, you can see that over the long term the returns have converged to 10% & only in the last 10 yrs you can see the returns again going up.

What are your conclusions based on these charts ? What do you think about gold movement from this point onwards ?

What affects gold prices in India?

Other than basic jewellery demand, there are two other factors that affect gold prices in India?International prices Gold works on price parity, which means 10g of gold has the same value all over the world, hence international prices are important. Hedge: Other than for its ornamental purpose, gold has been used as an investment asset. This is because gold can be used to protect against any depreciation in other financial assets which happens at times of uncertainty. This is why historically gold has been used as currency.

Dollar dynamics: Moreover, gold is used as a hedge against movement in the US dollar, which means typically gold prices move inversely to change in strength or value of dollar. Exchange-traded funds: Globally, demand for ETFs has increased. Typically, funds are required to maintain the value of ETFs sold in the form of physical gold, driving up overall demand. Rupee vs dollar As imported gold is valued in dollars and then converted to a rupee value for consumption, the rupee-dollar exchange rate is important. Thus, even though international gold prices have corrected in the last 2-3 months, domestic gold prices have risen, because the rupee depreciated around 8% against the dollar since February this year.