Monthly Discussion



Gold: Price vs. Production


In one of the early issues of this newsletter (November 22, 1999) I had indicated that the annual worldwide gold production, while growing, it undergoes a rather regular oscillation with a period of about 27 years.* In today痴 newsletter issue I will try to relate changes in gold production to changes in its price.

There are contradicting theories about how the price of gold should relate to changes in the level of production. One may argue that availability brings the price down, or alternatively that hikes in price stimulate production. The facts supported by annual data (see Exhibit 3) show evidence of positive correlation between price and production during he first few decades of the 20th century, that is, gold price and world production went up and down more or less in phase. But there is evidence for the reverse during the last few decades of the 20th century.


Gold Production and Price


Exhibit 3. Data and general trends for the world production and the price of gold in constant 1998 dollars. The tends, represented by the smooth lines, are exponential fits to the data. Deviations from the trends seem in phase during the first half of the 20th century but out of phase in recent decades.


We can extract the cyclical variations around the trends of Exhibit 3. This is done in Exhibit 4 for the production of gold and in Exhibit 5 for the price of gold.




Exhibit 4. The percent deviation around the trend of world annual production of gold seems rather regular. A decline is expected in the next few years.


A decline in the deviation from the trend does not necessarily mean a decline in the absolute numbers of world production. The trend grows exponentially and therefore a flat production is tantamount to a declining deviation from the trend. However, judging from the regularity of the pattern in the past (Exhibit 3), we are likely to see a decline also in the absolute numbers of annual gold production.

The deviation of the price movement, however, is in the opposite direction. Exhibit 5 shows that the price of gold has been decreasing (in constant dollars) for more than 20 years. An increase is therefore expected for the years to come.


Exhibit 5. The percent deviation around the trend of the price of gold (in constant 98 dollars) has been decreasing since 1980; it should be going up for he next few years.


In quantitative terms, the negative correlation between price and production of gold in recent years is comparable in size to the positive correlation seen early in the 20th century. In both cases, however, it is not a strong correlation. Only 40% of what happens to the price can be explained by what happens to the production. The rest obeys other extraneous factors, such as politics, mass psychology, and wars.

In the present political climate the two components go hand in hand. The price of gold should be increasing on its own at the rate of 15% per year. Helped by a war in Iraq, it could increase significantly faster.

* Interestingly 27 years is half the Kontradieff cycle, which is also the cycle of major worldwide conflicts!