Exponential Gold Price?

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Michael Höhne's picture
Michael Höhne
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Exponential Gold Price?

The gold price is rising constantly and I looked for historical prices, found them and created some charts based on chosen data.

What you usually see on investment sites are graphs showing the gold price of a few days, months or years. Here's an example of the average gold price of the last five years (2004 - 2008): 

When looking at this graph you could say that gold did very well and doubled in the last five years. You could also say that there have always been high gold prices and five years of data isn't enough to make any conclusion.

So here's the next, showing the average gold price of the last 30 years, another very common graph:

Using this visualization, you can argue that the gold price roughly gained 50% in 30 years and is by far outperformed by any other investment type.

So let's see what happened since 1970. I used 1970 as a starting point, because since 1971 the Dollar wasn't backed by gold anymore.

Even this graph won't raise too much concerns, though the building of a hockey stick is somehow visible.

While all of the charts above could be used to oppose investments in gold, the following shows the average gold price from 1833 to 2008:

It is not an exponential function in the beginning, because the gold price was fixed until 1971. However it shows the same hockey stick Chris' showed in the Expontential Growth video. It also makes it very clear that there indeed is an exponential factor. Interestingly the shape of a hockey stick broke in 1982 but continues in 2002.

After assembling this chart, I'm still impressed by it, because it looks so different than all other charts I found so far.

Michael

 

affert's picture
affert
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Re: Exponential Gold Price?

I would make sense that the price is exponential recently, since the price is measured in US$. 

Gibber's picture
Gibber
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Re: Exponential Gold Price?

Have you considered tracking against average house price in ounces of gold Vs Average house prices in dollars from 1900?

 Don't know if that can be done. Or where you would find the data. 

 Might give a different spin to it.

Michael Höhne's picture
Michael Höhne
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Re: Exponential Gold Price?

Have you considered tracking against average house price in ounces of gold Vs Average house prices in dollars from 1900?  

Interesting idea. I don't know where to look for average housing prices either, but if someone does, then I'll do.

Michael

Woodman's picture
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Re: Exponential Gold Price?

If you believe gold tracks with inflation and there has been more or less a constant rate of inflation then an exponential curve will be produced.  There's lots of charts out there comparing gold with inflation but I'm not an expert enough to make conclusions.

Michael Höhne's picture
Michael Höhne
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Re: Exponential Gold Price?

If you believe gold tracks with inflation and there has been more or less a constant rate of inflation then an exponential curve will be produced.  There's lots of charts out there comparing gold with inflation but I'm not an expert enough to make conclusions.

I'm not an expert either and don't want to predict anything. It's just the graph I saw after typing in the numbers. Comparing gold to the US Dollar or the Euro may be obsolete in the future anyway.

jmar8692's picture
jmar8692
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Re: Exponential Gold Price?

IMHO - the spike in 1980 was just a bubble inflated by speculations and on the other hand, the decline in 90's should be attributed to the believes in the "new economy era", in which the gold was believed to be obsolete and useless, while the stocks were widely believed to keep their double digit growth every year forever... Remember the unfortunate Gordon Brown, who sold 60 % of U.K. gold reserves when the gold bottomed Laughing

For example, if we consider the total US inflation between 1987 and 2007, which is about 80 %, then the increase in gold price from $400 to $720 can be explained simply by adjusting to that inflation. If we agree, that the official CPI is rather underestimated, we should not be worried about current $900+ level at all.

Naturally, if you measure anything which keeps its value in USD (which diminishes in value at say 3 % p.a.), then you'll get the hockey stick chart (sooner or later) as Woodman pointed out.

Peter Schiff often mentions the dow/gold ratio, which used to be historically mostly under 5 (meaning that you could buy 1 unit of Dow for 5 or less oz of gold). The exception was the Great depression, during which the ratio climbed to 15, but then it has fallen back to 5 until the WW2. Then it started to climb again, because the gold price was fixed, but the USD suffered from all the war related inflation (which the stock adjusted to). When the gold standard was utterly abandoned in 70's, the gold prices surged and the dow/gold ratio plummeted and bottomed at 1 in 1980. Then the "new era" began and the well known stock bubble started to inflate. The ratio climbed to astonishing 40 during the .com bubble. Today, we are at 8.7, which means that we are slowly reaching the historical equilibrium of 5. It would be reached if Dow falls to 4.500 or gold rises to 1.580 or some combination of both, say dow at 6000 and gold at 1.200. However, many people are speculating that the "pendulum" will have some momentum and the ratio could bottom at 1 or even lower, which makes the gold even more attractive for a long term investment.

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poppabear
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Re: Exponential Gold Price?

Most of us have been waiting a long time for the price of gold to start taking off again.

Gold as well as most other commodities have been held down for quite a long time by the bankers. The world wide economic system is based on paper and the Central Bankers will lose power when commodities begin to rise. If the system is driven by paper and credit, it would not be in the interest of the bankers to have the public buying up tangible assets.

Gold and the rest of the precious metals have become the only real safe investment. I believe the current gold price is not anywhere near the price it should be at, based on inflation and debt.

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Re: Exponential Gold Price?

not to be ignorant, but what is the purpose of trading in gold? what intrinsic value (utility) does it have besides acting as a constraint to print in a monetary system or act as a medium of exchange? because it has no real usefulness, it seems like the price of gold is based on speculation. what would you want to buy gold? to do what with it? i can understand real goods like commodities and futures being profoundly impacted by inflationary policies because those are real things with real use. i only see gold being used by investors to gauge other investments relative to it. it is the benchmark by which speculation is judged. if the price of gold accurately reflected the level of inflation, wouldn't the price of gold grow as fast as the monetary base? i don't have statistics off-hand, but suspect growth of the monetary base (m3) has outpaced the price of gold in the last 30 years. can someone help me out here?

also, while i'm on this speculation diatribe, that seems to be the case with rising house prices. adam smith brings to our attention that housing in general is not a revenue generating assest. so the real value of the house, what it would trade for in real terms like 500 cows or 1000 palm trees, should never really change. i can think of exceptions where this may not be true, but in general housing prices are driven by easy credit and/or speculation that the house is going to be worth more tomorrow. so pegging the value of housing to the value of gold seems arbitrary because housing prices have speculation built into them (especially recent housing) and gold seems like an inaccurate measure of inflation.

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Ruhh
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Re: Exponential Gold Price?
Gibber wrote:

Have you considered tracking against average house price in ounces of gold Vs Average house prices in dollars from 1900?

Don't know if that can be done. Or where you would find the data. 

Might give a different spin to it.

For what it's worth to you here's a chart for a few Canadian cities.

http://www.canadian-housing-price-charts.235.ca/value_in_gold_chart.htm

Maybe this chart might help you compare to similar cities in your country?

Denny Johnson's picture
Denny Johnson
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Re: Exponential Gold Price?

Michael.....thanks for sharing all that

jmar8692.......thanks for that analysis, makes sense

bb..gun..........................you said, "what intrinsic value (utility) does it have besides acting as a
constraint to print in a monetary system or act as a medium of
exchange?".................I'm no expert but that's twice as many reasons as I can think of for holding paper money..........I look at gold as the strongest currency/medium of exchange there is for now.

bb_gun's picture
bb_gun
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Re: Exponential Gold Price?

 hey denny,

i have not been around for some time. while i am here i figured i would respond briefly.

historically, using gold as a medium of exchange has never worked out. when gold is minted or traded, prices fluctuate immediately with gold's scarcity and deflation becomes the overwhelming fear. personally i would rather live in a world where money is plentiful and competition for resources is excessive (inflation), opposed to the scenario where no one has money and production comes to a halt because there are no bidders for economic activity(deflation).

gold as a constraint to printing money, or keeping real prices stable, has also failed. that promise is only as ironclad as the politician/bureaucrat who makes it. suppose our gold stock begins to fluctuate with increasingly diverse trade (maybe foreign countries manipulate the gold market), what politician would would commit themselves to free-market principles over monetary instability. That would simply be unamerican! =) in all seriousness, there are many flaws with the gold standard, but this dillusion is pure fantasy. ironically, the government-hating libertarians who typically advocate for a gold standard and fervently detest the government's ability to manage great wealth more than any other political group, somehow trust the government/bureaucrats to "do the right thing" with our money supply. ha

i think inflation sucks as much as the next person, but we have to ask ourselves an important question, how does a growing money supply affect real prices? if a construction worker has to supply 1000 hours of labor to purchase a car in 1985 and 2000, then what difference does it make that the car's sticker price has changed over time (this example clearly excludes technology and competition, but hopefully it drives the point home)? in my mind, it doesn't matter. real value, or what we produce, is what counts. not a pile of shiny metal. 

jeekqing's picture
jeekqing
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It is not an exponential

It is not an exponential function in the beginning, because the gold price was fixed until 1971. However it shows the same hockey stick Chris' showed in the Expontential Growth video. It also makes it very clear that there indeed is an exponential factor. Interestingly the shape of a hockey stick broke in 1982 but continues in 2002.

After assembling this chart, I'm still impressed by it, because it looks so different than all other charts I found so far.

Michael

 

 

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