Gold returns to favour with a 24% rise in 2006
The price of gold rose by 24% in 2006, new research from Clerical Medical shows. This was the largest calendar year rise since 2002, and the third biggest annual gain in the past 20 years.Since 2001, the price of gold has more than doubled, rising from $277 per oz to $635 per oz in 2006 – an average annual rise of 18%.
Over the last five years, gold has outperformed the FTSE All Share Index with gold prices rising by 129%, compared to a total return (i.e. measured by price movements and dividend payments) of 50% on the All Share Index.
Rob Devey, managing director, commented: "Gold has returned to favour in recent years. Over the past five years, gold has outperformed the stockmarket, bucking the longer-term trend. An uncertain geo-political backdrop encouraged strength in the gold price in 2006. A combination of US dollar weakness and renewed inflation fears has also contributed to recent gold price increases."
The Key Drivers of Gold Prices
The fortunes of gold are closely associated with inflation and asset price movements. Investors tend to buy gold and push up its price when the value of their investments is at risk of being eroded by high inflation or losses in the stock market, bond market or property market. In general, the price of gold rises when the stockmarket performs badly, and is most likely to fall when the stockmarket does well. Historically, gold has been viewed as the ultimate store of value.
In the late 90s rising central bank gold sales became a key factor, depressing the market then. For example, the Bank of England more than halved its gold reserves over the period 1999 – 2002, selling 395 tonnes of gold. Subsequently, the Central Bank Gold Agreements have added more certainty to these types of sales. Over the year to September 2006 central banks sold 395 tonnes of gold compared with an annual limit of 500 tonnes (under the second Central Bank Gold Agreement).
There has been strong 'fabricated' demand for gold in recent years, particularly from India and the Middle East, which account for nearly half of all gold jewellery demand. Fabricated demand for gold is currently around 3,000 tonnes a year and outstrips annual gold mine production of approximately 2,500 tonnes.
Gold Price Movements 1969 – 2006
There was a 15-fold rise in the price of gold between 1969 and 1980
Over this period, the price of gold rose from $35 per oz to $590 per oz; an average annual rise of 29%. This period was associated with rapid inflation as US inflation rose from 4.7% to 13.3%.
Gold prices fell by 45% between 1980 and 1985
The price of gold fell by nearly half from $590 per oz to $327 – an average annual fall of 11% - between 1980 and 1985. During this period, US inflation fell from 13.3% to 3.9% and US share prices, as measured by the Dow Jones Industrial Average, rose by 60%.
Further 40% gold price fall during 1987-1999
There was a significant fall between 1987 and 1999 when the price of gold fell from $487 per oz to $291 per oz – a total fall of 40%, or an average annual fall of 4%. This period was marked by large stockmarket gains and low US inflation with the Dow Jones Industrial Average rising by an average 16% per year and US inflation averaging 3.2% per annum. Central bank gold sales had also increased by the end of the 1990s.
Gold price rises by 129% between 2001 and 2006
Since 2001, the price of gold has more than doubled, rising from $277 per oz to $635 per oz by 2006 – an average annual rise of 18%. This rise has been caused by the dot-com meltdown, wars in Afghanistan & Iraq, and oil prices rising from $20 per barrel to $59 per barrel. There has also been strong fabricated demand for gold over the period, particularly from India and the Middle East.
The gold price peaked at US$720 per oz in mid May 2006, its highest level since January 1980, when the gold price hit an all-time high of US$835 per oz. From its May 2006 peak, the gold price fell 22% to US$563 per oz in early October but subsequently rebounded 13% to US$635 by the end of 2006.
In 2006 an uncertain geo-political backdrop encouraged strength in the gold price. A combination of US dollar weakness and renewed inflation fears also contributed to recent gold price increases. In 2006 the British Pound and the Euro both appreciated by more than 10% against the US dollar with gains of 13% and 11% respectively. Inflation in the US peaked above 4% in mid 2006 while in the UK the retail price index has recently seen an annual increase of more than 4%.
Biggest annual rises in gold
The biggest annual rise in gold prices in the last 30 years occurred in 1979 when there was a 133% increase. Investors rushed to buy gold as oil prices doubled after the Iranian revolution when an anti-American government came to power, US inflation rose to 9% and the world economy fell into recession.
More recently, 2002 was a very good year to own gold when the price rose by 24%. This increase occurred in the wake of the economic and financial uncertainty that followed the 9/11 terrorist attacks in the US in the previous year. Stockmarkets made a 22% loss, the dot-com bubble burst, Enron collapsed and there was the beginning of the war in Afghanistan; events that all enhanced the attractiveness of gold.
Biggest annual fall in gold price
The biggest annual fall in gold prices in the last 30 years was in 1981 when the price of gold fell by 32% as the world economy recovered from the 1970s recession.
The biggest annual fall in gold prices in the last 10 years was in 1997 when the price of gold fell by 22%. Investors dumped gold as the stockmarket returned 29%.
Gold compared to shares
Gold performance is judged solely by its price rise. Share performance is judged by its share price and its dividend (i.e. its total return).
Gold's outperformance of the stockmarket over the past five years bucks the longer-term trend. Between 1996 - 2006, gold prices rose by 72%, while shares provided a return of 114%. Over the last 20 years, shares delivered a total return of 709% compared with a 62% increase in gold prices.