Please Help Me Understand Gold


I graduated in 2000.In the same year I made my first purchase of  gold.Since then I’ve been watching the price of gold.The first thing to attract my attention was the relentless upward movement in the price show in the graph below:                                                                                                                                                                              wealthymatters.com

Logic suggested that what goes up in price must come down.So I tried looking for the historic prices of gold to try to see if there was a cycle .

At about this time I came across some write ups on how gold was the real money and the rest fiat currency, how gold value was fixed and gold prices were a measure of inflation.Then I came across more articles on the gold standard and doing away with it seemed to suggest that gold was now just another commodity just as currencies were also commodities whose price fluctuated on the basis of demand and supply.Would this then mean buying gold in another currency would be cheaper ? Questions,questions and more questuons.No answers.I was thoroughly confused.

Meanwhile during my search I came across graphs similar to the two below.The steep rise and fall in prices around 1978, incidentally the year I was born,was shown in USD,Pounds,CHF,Yen etc.But gold prices in INR and Rand were the exception and the pattern seemed to be like that in the second graph.

The oil shock was used to explain the first type of graphs but I had no explanation for why there didn’t seem to be a similar problem in India.We too import a lot of oil from the Gulf/Middle-East and pay for it in dollars.Didn’t we have the same inflation that the Americans had?

Or maybe I was on the wrong track. Was there some significance in the fact that India was a large consumer and South Africa a large producer of gold?

wealthymatters.com

 

wealthymatters.com

My next find was the inflation calculator here:https://wealthymatters.com/2011/01/22/inflationcalculator/ .Plugging in the prices derived from memory and old bills shows that gold prices have matched hand in hand with inflation in the last decade.But gold prices seem to have been depressed in the mid to late seventies,about the time my parents got married.This calculator seems to suggest that gold prices really do keep up with inflation.

wealthymatters.com

 How did the  Rupee-Dollar exchange rate contribute to the price of gold? I haven’t been able to find any data on exchange rates so far.The closest I have come is today’s find the SENSEX vs. DOLLEX  graph.

DOLLEX-30 is the dollar version of BSE SENSEX, the benchmark index of equity markets in India. Similar to the SENSEX, the base year for the DOLLEX-30 is fixed as 1978-79 and base value at 100 points.While Sensex reflects growth in market value of constituent stocks over the base period in rupee terms, the DOLLEX-30 reflects the changes in both the stock prices as well as currency values.The graph graph shows the movement of the Sensex and the DOLLEX-30 since 1979. The vast difference between the Sensex and DOLLEX-30 in respect of points became more evident and wider in the decade of the 1990s, owing to steep depreciation of the rupee against dollar. The Re-US$ conversion rate which was about Rs.8.21 in 1980 rose to about Rs.47.15 in July 2001 showing a six fold depreciation in the course of those two decades. This variation also explains the wide difference in the returns from both these Indices.At the current level of Sensex, in rupee terms the index increased around 34 times whereas in the US $ terms it increased by only 5.8 times

Interestingly both the historic gold graphs show a similar pattern in the latter half.

Could somebody please help me understand what goes to determine the price of gold in India ? Inflation,exchange rates,demand and supply,hoarding ,recycling etc ?

About Keerthika Singaravel
Engineer,Investor,Businessperson

7 Responses to Please Help Me Understand Gold

  1. gokkast says:

    Awesome blog, it’s just like a game for me! It’s so infomative and useful, thanks a lot! If you post more of this great stuff, I’ll visit your blog again!

  2. Gillaspie says:

    Keep up this good work, you have a nice blog over here with much good information!

  3. Pingback: The Gold Investor’s Bible « Wealthymatters

  4. Betty says:

    Interesting info.Can’t say I can help you understand gold prices in India.Sorry.

Please Leave Me Your Comments!I Love Reading Them!

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: