May 24, 2010

How Fast *Could* Gold Drop?

I've said before that I don't think gold is a very good investment based on the historic trends.  I think there is way too much hype nowadays over gold as an investment.   It seems to me that much of the hype over gold is due to peoples fear about the economy and people jumping on a bandwagon.  In my opinion the gold market has the signs of a bubble and eventually the bubble will pop.  But just how fast might gold go down when (if) it does?   I figured that looking at past declines of gold would give a decent reference.

We can find historical data on gold values from the Kitco site.  Back in the late 1970's and early 1980's gold prices grew significantly and then crashed.   Gold also had some smaller crashes later in the late '80's and 90's.  Here are some examples of recent periods when gold dropped in value:

  • Then after hitting a high of $850 an ounce in Jan. 1980 gold dropped to $481 by March that same year.   That is a 43% drop in value in just 2 months.   
  • Gold then recovered and hit $710 in Sept. 1980 but the price then slid again and by July 1981 it was down to $397.   That is a drop of 44% in a 10 month period.
  • Then from Sept. 1981 when gold was at  $463 to June 1982 when it hit $296 gold lost 36% in about 9 months.
  • Gold hit $499 in Dec. 1987 and dropped to $395 by Oct. 1988.   Thats a drop of 20% in 10 months.
  • In Feb. 1990 gold hit $423 and then dropped to $346 by June of that year.   Thats a loss of 18% in 4 months.
  • In Aug. 1993 gold hit $405 then dropped to $343 by Sept. 1993.  within just 2 month period gold lost 15%.
  • Most recently in 2008 gold hit $1011 in March 2008 and then sunk to  $712 by Oct. 2008 which is a 29% drop in 7 month period.
If we look at some longer periods of about 2.5 years (give or take a month or two) then we can see some fairly sizable declines.
  • All together from the peak of $850 in Jan. 1980 to June 1982 price of $296 gold lost 65% of its value in a 2.5 year period.
  • Then after recovering to $481 in Sept. 82 the value had dropped to $284 by Feb '85.   That is a 41% decline over a 2.5 years. 
  • In Dec. 1987 gold hit $499 but by June 1990 it was back down to $345.  That is a drop of 30% down in a little over 2.5 years.
  • In August 1990 gold hit $413 and then it $326 by March of 1993. This is a loss of 21% in under 2.5 years.
  • Gold hit $414 in Feb. 1996 and then slid to $273 by August 1998.    This is a 34% loss in 2.5 years.

Here are the drops that gold saw in periods of 12 month or less:

Jan 1980 to Mar '80: 43% in 2 months
Sept '80 to Jul '81 : 44% in 10 months

Sept '81 to Jun '82 :  36% in 9 months

Dec '87 to Oct '88 : 20% in 10 months
Feb '90 to Jun '90 : 18% in 4 months
Aug '93 to Sept '93 : 15% in 2 months
Mar '08 to Oct '08 : 29% in 7 months

Drops over periods of roughly 2.5 years:

Jan '80 to Jun '82 : 65%
Sep '82 to Feb '85 : 41%
Dec. '87 to June '90 : 30%
Aug '90 to Mar '93 : 21%
Feb '96 to Aug '98 : 34%

Now of course the past doesn't predict the future.   But if something has happened in the past then I see no reason why it couldn't happen again.

Looking to the past to give us ideas of how fast gold has dropped in value we can see that gold has dropped in value by as much as 44% in a short 2 month period and as much as 65% in a 2.5 year span.

In the past 3 decades gold has lost 15-44% in separate individual periods of 2-10 months.   And we've also seen gold lose 30 to 65% in separate individual 2.5 year declining periods.

In my opinion then when gold drops next then its pretty likely we could see a drop of about 30% within a 12 month period and potentially 40% losses within a 30 month timeframe.

Photo by tao_zhyn

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