Gold, To Buy Or Not To Buy That Is The Question

Galih Permadi Magister Management UGM Beasiswa Unggulan

Hundreds of years ago the worlds economic system was still based on barter system. For each item you want, you have to provide another item with equal value of the desired item. People found this system inconvenient eventually back then. Therefore they created the idea of a medium of exchange. The aforementioned medium must serve several functions of which now we know as money. This money basically served as a medium of exchange means that there still were values that guarantee the intrinsic value of said money we call this commodity money. The common commodity used as money back then were the precious metals namely gold and silver. Up to 1971, U.S. had adopted this similar system we knew as the gold-based reserve currency system. In 1971, being pushed by the cost of Vietnam War and the increased domestic spending that accelerated inflation, Nixon completed the transition from a gold-based to a purely paper (fiat money) and thus ended the Bretton Woods system. This means that the Fed can print as many or as little dollar as it sees fit. This condition had invited the de-dollarization (redeem dollar for gold) action from several countries holding the newly fiat dollar back then. As we can see from the graphic below, the de-dollarization had made the price of gold skyrocketed from under $50 per ounce up to $600 by aggressive demands within only under 10 years.

Source: kitco.com Recently more people, including the investment illiterate, consider gold as their investment or personal hedging solution against inflation. This phenomenon was natural considering the growth of the price of gold is roughly about 300% for the last five years, give or take, makes the 6-7% annually interest pay for deposit account grow unpopular. Even 2008 crisis has no significant effect whatsoever on the long term trend. This phenomenon can also be seen from the new gold-based investment products offered by financial institution to retail market, especially sharia ones. The gold euphoria was also seen about a month ago when there was a terrifying queue line in ANTAM for gold purchase, that has successfully made the gold price even higher. Nevertheless, many are still in doubt of the potential growth of gold. We could challange the doubt using academically approved technique such as forecasting or moving average analysis.

Source: Kitco.com Statistically speaking, there are two type of commonly used forecasting, historical analysis (time series) and driver analysis. Using historical analysis, we can predict that the price of gold will still be showing an increasing curve for a long time period, even though a short time rollercoaster ride is still likely to happen. The driver analysis can be used to predict the fluctuation of the price based on the event that most likely to affect the price. In this case, as long as the world economy is still reluctant to go back to the old gold-based reserve currency system, it is safe to say that the ever-increasing trend is still happening. The simple moving average analysis also is showing the same result (you can easily get the historical data of gold price easily on the internet to conduct your own data-based analysis). Comparing the long term simple moving average with the short term one, we can technically conclude the trend will still be uprising in the long run when the short period is higher than the long one, both are woving upward, and the current market price is still above the moving average of the short term period. Nevertheless, other things such as U.S. government policies on their debt for example, can lower the price for a while as we could see a few months ago. The recently happened economic crises in Europe and U.S. indicate the terrifying default risk haunting every fiat money or bonds that we hold, not to mention inflation. If those conditions were considered likely to occur in the near future then it is suggested that we consider our investment and hedging instrument on real sector,say gold for example, for the long run. Simply said, if you hold real asset, when inflation is high your asset price would also rise. The same condition will likely to occur in the time of crisis.