Thursday, February 8, 2018

Price patterns for gold? Really?

Figure 1. Gold price over last 15 years in U.S. dollars
So after a nearly 10 year rally, gold had gone up from around (U.S.) $300 to $1000 in 2008. Then during the stock market lows of 2009, it fell to around $750 or by 25%. The next thing is a humongous rally to $1850 or a nearly 250% rally. So yes, gold seems to fall initially during market crashes. It is not a fool proof hedge. But then a major rally followed.
Today’s stock market correction sees gold prices and oil prices fall along with the market. Oil should be tied to the economy which is doing well, yet its price has fallen over 10%. Gold is not supposed to be correlated to stock market prices. Pricing trends are often in the eyes of the beholder. If we get today a repeat in the gold price pattern as we saw in 2008, gold may well be up over the coming year. But to be honest, I have no idea how this all will work out.

Figure 2. Nominal gold price over last 100 years plus marked the 'Great Inflation Cycle'

In 1977, Nixon decoupled the U.S. dollar from gold (the U.S. had then too much debt - what else is new). What happened next seems pretty obvious from the above chart..  Is the gold price only a reflection U.S. dollar inflation as many gold bugs claim?
Figure 3. Inflation adjusted gold price (Priced in 2015 dollars or so)

Not really. The patterns in inflation adjusted constant 2015 dollars is shown above. Figure 3 shows there are clearly different price drivers than just inflation. Something with 30 to 50-year long cycles maybe. I guess the pre-1950 peak in inflation adjusted pricing reflects the Great Depression and the Second World War although the U.S. government kept (as shown in graph 2, the nominal gold price steady between the Great depression and 1950. So why did gold sky rocket in purchasing power? Great Depression deflation? Or was this pure a fear trade or something related to supply and demand?  Looks like a major crash around the mid-seventies after gold peaked at $800  or $100 nominally. The following real peak was in 1982, when it was $2000 or $800 nominal. Whatever the cause of the 1970-1982 cycle: another major upturn in inflation adjusted gold prices started around the changing millennium. If the 1970s cycle foreshadows the new cycle started around the year 2000, we may be in for a big ride and I suspect that is related more to the difficulties today in finding meaningful new gold mining prospects rather than anything else. So, yes gold prices seem not to reflect stock market trends, however, it may be set for a major upturn regardless of inflation. 

My point is, that you may come up with many explanations about gold prices; but gold does as gold does and it may not be in sync with stock markets. As such, it is a good diversifier and may rise during times of crises such as the World War II or during the great inflation cycle from 1970 - 2008, or now at the start of a new era of rising interest rates and inflation and with a lack of new gold mining prospects. Or, maybe markets are too complex to identify a single or even just a view causes for price movements and you just own a bit of gold as insurance without worrying too much why its price moves.  You don't want to be too smart when investing - it usually just gives a headache, creates overconfidence, and delusional believes in a fantasie.

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