With the gold price seemingly about to take off, this might not please gold bulls who are looking for much higher prices in the light of a threatened war with Iraq and various other short-term influences such as the drop in the US dollar’s value. But the bulls should surely take comfort from the fact that the data seem to show that gold does indeed hold its value over the long term.
Crowson is presenting his conclusions in a sequel to his book “Inside Mining” (published in 1998 by Mining Journal Books) that is scheduled for publication by the same organisation early in 2003. He says the new volume takes an in-depth look at issues and policies in the mining industry over the past 50 years.
He carried out the gold price exercise not simply for its entertainment value but because he has a serious point to make.
Received wisdom revisited Seventy years ago Harold Hotelling came up with an economic theory that has had a great influence on thinking in the mining industry. Hotelling reckoned, to over-simplify a complex subject, that the real price of metals rises in line with the real rate of interest, which is perceived to be in the 2-3 percent a year range.
Crowson points out: “The theory has been influential both as a yardstick for long-term price forecasting and also as a guide to government policies towards the exploitation of undeveloped ore deposits.”
Crowson, who was in the front line of economic forecasting during his 15 years as Rio Tinto’s chief economist, goes on not simply to demolish Hotelling’s theory but, so to speak, also to smash the fragments into dust.
One telling point that will particularly interest gold bulls is this. Had gold prices risen in step with real interest rates (taken as 2.5 percent a year) from the level at the end of the 16th century – that is $331 an ounce in 1600 in real 2001 terms – they would have reached roughly $25,000 an ounce by the end of the 20th century. As you may recall, prices were, instead, under $300.
For his analysis, Crowson has used data supplied by Michael Bailey at Rio Tinto. He has gone back 400 years for gold because prices have been recorded during the whole of that time. For other metals (or those that have been around that long) he has had to make do with data for the past 200 years.
In order to determine the “real” price of gold between 1600 and 1860, Crowson used the sterling price of the precious metal and deflated by an index of UK wholesale prices. For prices from 1860 to 1975 he deflated by US wholesale prices. The US implicit GDP (gross domestic product) price deflator was used to deflate gold prices for the past 26 years.
The result shows remarkably constant real prices for most of the 17th and 18th centuries, equivalent to a real 2001 price of just under $300 an ounce. There was a substantial fall in value in the late 18th century, to about $200 an ounce, and a subsequent recovery through the 19th century to a peak of $400.
Real gold prices were much more volatile through the 20th century, ranging from barely $100 to more than $1,000 an ounce. Crowson points out: “This partly reflects the impact of two major world wars and their aftermath, and the pegging of the money price of gold at $35 an ounce by the United States between 1932 and 1971.”
Gold bulls will be hoping that in the short term at least the gold price will go well above the 400-year trend. But only the most bullish are looking for even ten percent of that $25,000 an ounce
