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Gold Outlook for 2014

14 Aug 2018 - Archive

The question here is about as straight forward as they come: what are the chances goes appreciates in 2014? 

The following figure is what the year over year percentage change in the price of gold has been from 1919 to 2013. 

Not surprisingly, the price of gold has fluctuated a lot over the years.  The largest yearly gain was a little over 100 percent in 1980, while the largest yearly decline was about 25% in the year after the large run-up.  Additionally, the chart clearly shows the growth in volatility in the price of gold, akin the manner in which the volatility in equity prices has increased in recent years.    

On the left side of the chart is the distribution of the returns (histogram).  Overall, as indicated by the pink arrow sign, annual returns to owning gold is centered in positive territory, with the average annual return of about 9% and a median return of about 3%.  

The raw returns to owning gold do not address the change that gold will end 2014 in positive territory.

One way to answer the probability question is simply to count all instances when gold gave investors a positive return and divide that sum by the total number of years in the sample.  This exercise produces a 55% chance that gold will make its owner money in 2014. 

A second way to look at the change an owner of gold is going to make its owner money in 2014 is to count the number of instances when a decline in the price of gold is followed by another decline in gold’s price.  This method gives the change of the price of gold declining at 14%, meaning there is an 86% change that an owner of gold will make money in 2014 (presuming gold does not make a major surge in value in the last week and a half of 2013). 

A third method to look at the probability of gold appreciating in 2014 is to build a statistical model, predicting not just the year over year gain, but the change that the gain will be positive.  A simple probit model gives the probability at 93%.  The probabilities of all three are summarized below. 

Overall, the price of gold continues to fluctuate a good deal in the era of financial asset volatility, akin to equity prices.  The return to owning gold has averaged about 9% since 1919, while the median return has been about 3%.  In terms of the change that gold will appreciate in 2014, the raw probability is about 55%.  In digging deeper at the changes, the change that gold is going to appreciate in 2014 is between the simple 55% figure to as high as 93%.

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