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May 17, 2013, 01.00 PM IST | Source: Moneycontrol.com

Gold prices jumps 500% in 7 years, what next?

Gold prices: It is a good option to hold gold as a part of your portfolio to counter the unanticipated economic or political situations. But investing major money in gold especially during the times when bullion markets are looking for future signs (upwards or downwards) from major economies is not a smart option.

It is a common misconception that gold never loose its value. The history of gold prices have a different story to tell. Gold as an investment is no different from equities. The factors which affect the equity markets play their role in bullion markets as well. A study of the factors which affected the gold prices for the last 40 years will give us an insight.

1970-1980 : When Gold recoreded its highest ever price
The 1970 1980 period witnessed the first major bull in gold market. Rated at USD 35 per ounce at the start of 1970’s, gold recorded it peak at USD 850 in January 1980. The fall of Bretton Woods System was the governing factor for such a record high back then. Bretton Woods System was initiated in 1944 when dollar was pegged to gold. US had to maintain a constant reserve of 1 ounce of gold for every 35 USD. Bretton woods system was dissolved by US President Nixon in the year 1971. The yellow metal was allowed to trade freely after the collapse of Bretton Woods system. In the 1970’s most of the western countries faced high inflation rates, low growth and high unemployment rates. It was during this time the investors started intorducing gold as a part of their portfolio. Most of the countries started following floating exchange rate system as opposed to the fixed transactions in USD. In 1973, for the first time gold broke the USD 100 barreir. It was in January of 1980, gold recorded its highest price of USD 850 per ounce. The political turmoil at that point and weak economic data across the globe helped the gold reach its all time high of that period. If you consider the inflation adjusted prices, the USD 850 per gram still remains the all time high price recorded by gold.

1980-2001 : Correction Period
It was more like a one way down south for gold, after experiencing the record price in January of 1980. By January 1990, gold was trading around USD 400 per ounce. It started the new millenium in January 2000 at around USD 300 per ounce. So it was a two decades of downfall for the yellow metal. The economy of the western countries was booming in this period. These economies had stable economic conditions compared to the stagflation experienced in the 1970’s. The interest rates during this time were also at record high in order to control the inflation rates. The investors were favoring shares and bonds over gold. In the 90’s the major factor for downfall in gold prices was the technological revolution. US transformed itself from being a manufacture heavy industry to a technology and service based economy. There was a huge growth in productivity and expectations were riding high on the new technology wave. Gold lost its luster in this high tide.

Post 2001 : The bull run that seemed like forever
Gold prices have experience new highs post 2001. Trading at around USD 250 per ounce, it reached as high as USD 1400 per ounce in 2011. Lack of supply, demand from India and China had a role to play in this rally. India and China are the largest importers of the gold. Starting 2001, the gold prodcution fell and demand from these countries was on a rise. It was still a steady growth for gold till the start of recession times. The start of recession times around the year of 2007 sparked substantial spikes in gold prices. The announcement of stimulus packages by US sparked this rally. The national debt of US was on the rise. Investors started favoring gold as a hedge against economic uncertainities. Even the central banks of various nations joined the gold buying spree to boost their gold reserves, driving the demand and prices higher.

Conclusion: Gold as any other investment do not always guarantee a positive return. It is a safe haven against inflation and economic/political turmoil. But the history always gave ample examples of how various economic factors played their role in determining the gold prices. It is a good option to hold gold as a part of your portfolio to counter the unanticipated economic or political situations. But investing major money in gold especially during the times when bullion markets are looking for future signs (upwards or downwards) from major economies is not a smart option.

To check full chart of Gold prices click on the attachment

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