Analyssis on Extraordinary Yields and Turning Points of Gold Price

Analysis on Extraordinary Yields and Turning Points of Gold Price

Introduction

“We shall learn from the history.” Through empirical analysis on movement of gold price in years from 1971 to 2011, this paper studies the triggers of fluctuations and the reasons of turning points, hoping to chase the driving forces of gold price, both positive and negative.

• Daily yield exceeds ±3% with only small probability: After study on the 41-year data of gold price, we found that the daily yields follows the normal distribution, and that extraordinary yields, which exceeds ±3%, account for only 5% proportion of all yields (from February 1971 to December 2011). That is, positive extraordinary returns (more than 3%) account for 2.5% of the proportion, and negative extraordinary returns (less than 3%) 2.2%. Statistically, we can conclude that, extraordinary yields are out of the 95% confidence interval of gold price yields in the last forty years.

• The frequency of extraordinary yields gradually declined: The whole period is divided into three main phases (periods): bullish phase from January 1971 to January 1980, bearish phase from January 1980 to September 1999 and bullish phase since 1999. We found that bullish phase of 1970s had the highest occurrence of extraordinary yields, no matter positive or negative. As time went on, the frequency of extraordinary yields declined. For example, in the last decade of bullish market, the gold price rose sharply (strongly), while the number of days with extraordinary yield decreased. The main reasons causing less price fluctuations are as follows: firstly, in the modern world, governments’ intervention in the currency market became less apparent to the public. Secondly, with the rapid development of international trade, the friction between different currencies eased. As a result, incidents like 10% depreciation of U.S. dollars in 1970s or the Plaza Accord would rarely happen.

• Policy changes are...