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
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| 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 |
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| 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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