Gold Story Since 1991 : A MacroEconomic Perspective

PREAMBLE
A lot of us Indians set store by Gold – both as an item of value, a shubh indication or item so to speak, as well as by its capability to generate returns. While I don’t argue with the first – Gold is indeed auspicious, and also in addition comprises Streedhan, and has no comparison on that scale. But as an investment vehicle it leaves a lot to be desired for. In the realm of macroeconomics, in addition to this, Gold is also used as an indicator by some people, and as a hedge against inflation.

BACKGROUND
The purpose of this article is just to look at the price of Gold over the past 20 – 25 years, and look at the returns it has generated over this period of time. This is the first article in a concerted effort to understand the interplay between various macroeconomic indicators and overall economic performance. I am documenting my thoughts and my personal research on my blog so that others who may have the same thoughts can be stimulated to research for themselves. For the period 1991-2017, the returns from Gold over the 25, 20  year periods has been range-bound in the area of 8-9.5% approx., which needs to be kept in mind by retail investors; as my article is not about retail investment, I leave it at that. The data is readily available, interested people can study and draw their own conclusions.

MACROECONOMICS
Gold in MacroEconomics has no precise treatment to the best of my knowledge; that said, various experts have tended to use it as a lagging indicator or as a proxy. However, in the 25 years whose price I have studied today, I could not find a correlation, except one significant factor- which is anyway well understood by Economists the world over. I will come to that later on in the article. Gold is universally considered a hedge against risk and inflation, due to its perceived safety and value proposition.

WHY STUDY IT FROM 1992
That is why I chose the year 1992 for the beginning point – as Gold is thought to be a lagging indicator. Even if you go back, the price of Gold was stable from 1988 through to 1991, when it jumped by nearly 25% - recall 1991 was the crisis year when we had the balance of payments crisis. The price movement of ,a lagging indicator. In fact, a comparison of Gold vs Senses makes for a most interesting study – both charts given below for your ready reference and study.

We have seen that Gold price can fall – recent history is proof of that; and has been proven time & again in the past as well. But more to the point is the comparison of the trendlines of Gold, GDP Growth and Sensex, which can then use to judge the direction of the economy. Further, we are well aware of the exact events that have occurred in the study period in terms of various marcoeconomic factors, as I went into in a previous article on my blog, replete with charts. Such a combined comparative study across parameters can then be an indicator of the current situation.

GOLD OVER THE YEARS IN CHARTS

Chart 1 - Gold

These are given in the 3 charts above & below- one each on Gold Price, Gold vs Sensex, and GDP Growth rate. It is a most instructive comparison across these three parameters. The charts {Charts 1 & 2} clearly show a flat trend of Gold rates leading upto the watershed year in Global Economics – 2007, and the sudden spurt in the prices from that year. This is also replicated in other indicators – like inflation, given below – which is another macroeconomic indicator. From any parameter, almost, that we may choose for assessment, the year 2007 comes out as a significant watershed; nothing was the same afterwards. But that line of thought shall have to be consigned to the waiting bin for now; let us move on to Gold.

Chart 2 - Gold Vs Sensex


The interesting aspect is the years 2010-2016, wherein it is evident that gold was hovering or in fact increasing as uncertainty and issues cropped up for the UPA Government – a small but significant proof of the fact that Gold is a hedge investment against uncertainty and risk. But the most critical aspect is the trendline in comparison with the Sensex – in itself not exactly a great comparison, but one that gives unsights nonetheless. One can see Gold rising steadily even as risks piled up in the Global Economy in the leadup to the 2007 event, and continue its rapid rise through the tumult.

Chart 3 - Sensex


But most interesting is the event of 2004-2006, wherein Gold had, after a remarkably steady few years at 4000-6000 levels, jumped up by a significant margin. This is a lead indicator, which is not borne out by the some examples of prevalent macro-economic theory, which identifies Gold as a lagging indicator. Not being a qualified economist I cant say more; but I have personally always traced Gold as a Leading Indicator of the Economy. Given that it is a hedge against risk & uncertainty, it is fairly certain that as risks become unacceptable, investors will shift towards safe havens.

Chart 4 - GDP

Chart -5 : Inflation


Now coming to the present, we have seen in previous articles that the current situation is, to put it mildly, rather dicey; with a series of indicators ranging from PMI to GDP indicating a rising unease in the Economy. Let us put it all together to see if we can spot a trend. Interestingly, here again a trend is clearly visible – as seen above in the rising Gold price from 2011. But trace the inflation, gold, sensex and gdp graphs from 2004; {Charts 1, 2, 3, 4 & 5}  we can see all are again rising in that period. However, the current situation is markedly divergent – in that inflation is falling, demand is falling or subdued {it follows from inflation, but demand trends are also available – the subject of a future article on my blog}

Moving on, once again, we can see Gold reversing the trend of stability or falling prices from 2011 towards a higher returns from 2016, which again coincides almost perfectly with the rising stress factors identified in my earlier blog in this continuing study of the Indian Economy. Again, we can readily see rising uncertainty in the period of 2016-2017 due to various well-known factors; which is tending to shore up Gold prices for now. From this we can surmise that, given the various factors identified in the previous article – PMI, GFCF, IIP, PMI, Credit Growth, Rising NPAs etc – the uncertainty period is far from over.


That is self-evident; or should be – yet we can find grandiose statement abounding. But sadly, this is not borne out by any Macro-Economic indicator that I have studied so far. It will be some time before the Economy can begin delivering the hoped for numbers, which is what is indicated by all the indices we have looked at so far in this continuing self-study of our economy. That is also what the movement of Gold seems to indicate, at least to my mind. But over and above this – this small study raises deeper questions in my mind, as I trace the period from 2002 onwards till 2009, and see the sudden spurt in prices and indices from 2004. Are we still suffering from the aftershocks of the seminal 2007 event that shook us all? That is a question I hope to answer in the fullness of time…  

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