A picture tells a thousand words

The past few posts have been building up to this moment: where I can reveal the fruits of my labour - my very own gold price charts!  There are two on show, so let’s deal with the first one.  This shows the price of gold on an annual basis from 1978 - 2011 (found here). 

Figure 1:  Average annual price of Gold (USD/troy oz.), 1978-2011

There is a definite upwards trend from around the year 2000 and a price just above $200/troy ounce, to 2011 and a price just shy of $1600/troy ounce.  In the space of a little over a decade, there as been a near eightfold increase in the value of gold.  This certainly has the hallmarks of being a positive feedback loop.  However, note that these prices are not including inflation adjustment: $100 in the 1970’s is worth considerably more in 2011.  What effect will inflation adjusted prices have to the overall trend?  Annoyingly, I only recently came across this site that will carry out the inflation adjustment for you (quite a bit quicker than having to do it in excel like I did!)  Take a look at what happens when I adjust these annual prices for inflation (the red line) and transpose it onto the original chart (blue line).  

Figure 2:  Average annual price of Gold (USD/troy oz.), inflation adjusted and nominal , 1978-2011

We see that gold reaches a peak of over $1600/troy ounce in 1980, only for it to decrease over the next two decades.  By year 2000, the price of gold is at its lowest level in two decades, and sees a near four – fold increase in value over the next decade.  Note however, that the 2011 peak price is actually lower than that of the peak in 1980.  So, in inflation adjusted terms, if you had bought gold in 1980, it would actually have decreased slightly in value by 2011 – not a great 30 year return on your investment!  There’s an extremely important lesson to be learnt from the second chart: don't be fooled by the money illusion, and always think of inflation!!!  By not having inflation adjusted prices, it might seem as if gold is reaching a 30 year high.  But when we adjust for inflation, we can see that the price of gold has not even reached its previous high – set over 30 years ago.

Mull over these charts, as next post we’ll pull together the theory mentioned in the previous posts, and see if we can apply the “bubble” label to gold.