Grim estimates about gold price direction seem more real
Gold is widely seen as an inflation hedge in times of uncertainity and financial crises. However, as an investment in the long run the metal’s return is close to zero. Trough 1, 5, 10, 15 and 20 year investment spans, the variation in the nominal and real returns of gold has not been driven by realized inflation. Compared to history, the real price of gold is currently high. The successive real returns have been below average when the real price of yellow metal was above average levels.
The yellow metal has a potential inflation hedging ability, according to widespread beliefs. However, investors might benefit from it. Traders on the other hand, usually are looking for active markets to trade assets and make profits on the way up or down.
In early 1933, President Roosevelt banned private ownership of gold in the United States. US citizens were once again able to own and trade gold in 1975. Only at the that time, the gold’s market price became readily visible with the launch of trading gold future contracts.
One of ways to estimate the real price of gold is the ratio of the nominal precious metal price relative to the CPI. The US Consumer Price Index value in January 1975 stood at 52.1.11. At the same time the ratio of the nominal price of gold relative to the CPI index was 3.36.
The real gold price ratio has averaged about 3.2 since the begging of future trading contracts. In January 1980, the ratio hit its peak with a high value of 8.73. The lowest value level of 1.46 was bottomed in March 2001. Under this calculation method, the real price of gold in March a year ago was 7.3. From the launch of gold futures this was the only other time the real yellow metal price has been as high as was in 1980. Right after the real price peak in 1980 nominal commodity price as well as the real price of gold tumbled marginally.
Till that day, gold price growth driven by inflation and the actual price of gold has seldom been the same. Considering the latest value of the US CPI index, the real price of the yellow metal should presently be around $780 an ounce.
Such estimate, even as grim as it may seem to long-term investors and traders, becomes more probable for most market participants, who do not find reasons any longer to place their assets in gold. Without inflation, holding a hedge againt it seem useless. In addition, traders are seeing less profit opportunities in a tight range bound precious metals market.
With the US Federal Reserve announcing its plans to map a strategy for exit of the bond buying programme aimed at stimulating world’s largest economy, the yellow matl will probably loose its luster and value faster than big money managers warn us.