Gold price at 5 year low – grounds for optimism?

I grew up in the post-war period when gold price was fixed at $35/ounce. That came to an end in 1971 when the US Dollar was decoupled from the gold price. Gold price has little to do with supply and demand and is more a measure of existing financial turbulence or fears about coming turbulence.

gold price 1900 - 2000

gold price 1900 – 2000

The gold price dropped to just under $1100/ounce yesterday. But does it actually function as a forward indicator of what is to come? Many analysts see it as a trailing indicator reflecting the movement of money into a “safe haven” or out of “safety” into areas of perceived , future growth. Rising gold prices then reflect – after the event – turbulent times. Growth, of course, lags investment. Therefore, it is thought, that falling gold prices is a forward indicator of coming growth and an indicator at least of bullish sentiment if not necessarily of a bull market.

Gold price 2010 - July 2015  graphic Bloomberg

Gold price 2010 – July 2015 graphic Bloomberg

Certainly the soaring gold price after the financial crisis reached its peak of $1883/ounce in September 2011 and stayed at very high levels through 2012. The current decline started in January 2013 and has been followed by rising markets for the last 2+ years. But while a weak growth (sans inflation) is beginning to show up globally (strong in the US, weak in Asia and treading water in Europe), a real growth spurt ought to bring gold price down to less than $1000/ounce.

So the current level and falling trend shows at least that in spite of the Greek problems and the Eurozone weakness, expectations of growth are still strong. Historically, before and during the “good days” of the 1990s, gold prices were at or lower than $400/ounce. The 2008 financial meltdown itself took prices from 800 to 1800.

Gold price 1980 - july 2015

Gold price 1980 – july 2015

So I’m looking for a global growth level corresponding to gold prices back to around $900/ounce. But, unfortunately, I suspect that the gold price will not function as a forward indicator but will only reflect what has already happened. So, if it drops to less than $1000, my retirement funds will be reasonably safe.

But if it rises, I’ll have to have scrambled long before it does.


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