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History suggests that gold prices should fall

In five instances since 1971, gold prices have corrected by 40-50 per cent after every rally

Rajesh Bhayani  |  Mumbai 

When did you last find the market in the grip of bears? While since 2001, the market has been moving only one-way, which is up, only with some consolidation and correction in the last two years. But history also suggests that prices can fall, and they can fall sharply. If you think that bear runs, if any, in may not last long and prices will always rebound sooner, then let me remind you that prices were in a bear grip for 12 years prior to the current bull run.

The current bull run has been the longest in terms of time frame and has brought the best returns during the last five decades. The bull run, which is now in a consolidation phase, started in 2001. The trend of monthly closing prices since 1971 suggests that the current bull run started from March 2001 when international prices were $258 per ounce, which have gone up by 608 per cent to $1,826 an ounce in August 2011 (127 months). On an intra-day basis, prices had crossed $1,900 too.

However looking at the last five phases of price movements since 1971, after every rally, prices have seen sharp price corrections, and have declined by 40-50 per cent.

The current bull run gathered steam after terrorists attacked the twin towers in September 2001, and the world slipped into a recession. The previous big bull run after 1971 was between August 1976 and September 1980 (50 months) when prices went up 541 per cent to $666 per ounce. That was the time when huge speculation in and had pulled up prices. During this period, prices also went up quite sharply.

Bull Phase
Date $/Oz Date $/Oz Chg(%) Duration in Mths
Scenario-A Dec-71 43.48 Dec-74 183.85 322.84 36
Scenario-B Aug-76 104.00 Sep-80 666.75 541.11 50
Scenario-C Jun-82 317.50 Jan-83 499.50 57.32 7
Scenario-D Feb-85 287.75 Nov-87 492.50 71.16 34
Scenario-E Mar-01 257.95 Aug-11 1825.72 607.78 127

Bear Phase
Date $/Oz Date $/Oz Chg(%) Duration in Mths
Scenario-A Dec-74 183.85 31-Aug 104.00 -43.43 20
Scenario-B Sep-80 666.75 30-Jun 317.5 -52.38 21
Scenario-C Jan-83 499.50 28-Feb 287.75 -42.39 25
Scenario-D Nov-87 492.50 30-Jul 255.95 -48.03 142
Scenario-E Aug-11 1825.72 28-Feb 1579.58 -13.48 18

Soon after that when speculators, led by the Hunt brothers in the US, failed to hold prices (Hunt brothers are more famous for their speculation), the market corrected sharply and prices fell to half in just 21 months.

In the 1970s, the world was polarising around US and Russia after that many western countries dropped the standard and began freeing their currencies. Just prior to that was steady around $30-35 per ounce for a very long time, but after that it jumped sharply.

With this background, if one were to judge what could happen to prices going forward, then history suggests that prices should fall. When this price correction will start and how much it will be is anybody’s guess. If one takes the $1,900 peak, then prices are already at $1,600 and analysts are projecting $1,250 as worst case scenario for 2014 if the global economy recovers.

While this is the case for international prices, could they fall so sharply in India? The question arises because the rupee depreciates against the dollar and hence prices in India need not fall much in rupee terms. We have studied data of prices from 1996 to 1999 during which international fell by 32 per cent while fell by 20 per cent in India. Remember this was the period when the South East Asian countries faced currency crisis and currencies of several countries depreciated beyond expectations, but prices still corrected.

First Published: Tue, April 02 2013. 17:01 IST