After the US Fed cut rates yesterday, the dollar weakened and Gold Rose to Highest Since 1980 as Dollar Slumps on Fed’s Cut.
Gold futures for December delivery jumped $11.70, or 1.6 percent, to $735.50 an ounce at 3:26 p.m. in electronic trading on the Comex division of the New York Mercantile Exchange. That marked the highest price for the most-active contract since Feb. 11, 1980.
Indian gold prices are now at Rs 9450 per 10 gms (well below all-time highs), but Tokyo gold futures hit a 22-year high of 2,721 yen per gm.
I figure this is a good time to share the results of some research I did recently. I have collected historical prices of gold in India from 1893 to 2007 (114 years). I wanted to find out the annual rate of return for gold in India, over various time periods, and as is the case with most asset prices in India, getting historical data is the most difficult part. Nevertheless, I managed to find sources for ~70% of the years, and interpolated the rest as best as I could.
- A hundred years ago, in 1907, 10 grams of gold cost Rs 1.4 (yes, that’s not a typo!). Today, the same amount costs Rs 9450.
- Until 1920, the Indian rupee was directly linked to gold, hence the data prior to that year is somewhat irrelevant in computing annual returns.
- Over long periods (30 years or more), gold in India has generated annual returns of 9-10%.
- Another way to look at it: the Indian rupee has depreciated by 9-10% a year vs gold.
- If we draw a trendline rising at 9-10% a year over the entire period, and compare the actual gold price to that ‘predicted’ by the trendline, then we find that gold has gotten undervalued by as much as 60%, but has gotten overvalued by almost 150% at times!
- Presently, gold is within +/- 20% of the trendline price.
- I say +/- because this is sensitive to the starting year of the trendline.
A look at gold prices during the 1920-1950 period (up 50x), and 1970-1980 (up 10x) helps one understand why we are supposed to be ‘fascinated’ with gold. When your currency depreciates that fast, and there are no alternative assets easily available to the masses (eg. stocks, inflation-protected bonds, real estate, etc.) there remains only one defence: gold.
I continue to look for more sources of price data and would appreciate any help; we can compute several more metrics such as: returns over 5/10/20 years, cyclicality (if any), typical up/down returns in bull/bear phases, typical over/under valuation in gold prices, trendlines starting at different years, etc.