Gold: two charts that tell very different stories

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That’s a pretty scary chart. By carefully selecting the start dates and rebasing the two lines, I could make a strong case that, just like in the period around the Iranian revolution in 1979, the gold price has overshot on geo-political and economic fears - and risks falling back rapidly as those concerns are better understood.

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But what if this chart is just a visual confirmation of what I already believe. One clue is that the lines start at quite different places over on the left-hand side. In both periods, the gold price rises strongly but the gains more recently still pale by comparison with the spike nearly 50 years ago.

So, to test whether I’d just indulged in some wishful thinking, I played around with different start dates and rebased the charts not at the peak but at the start.

This is what I came up with:

The same data but looked at through a different lens. And telling a completely different story.

Looked at this way, the comparison between the two lines is much closer. The trajectory of the gold price in the years before the Iranian revolution and associated oil price shock is almost identical to the doubling in the gold price over the past two to three years.

Far from pointing to an imminent reversal in the gold price, this way of looking at the historic parallel, suggests that the precious metal could yet rise much further. It hints that a further deterioration in the fragile situation in the Middle East (or some other unknown event) could still trigger a flight to the perceived safety of gold.

So, what can we learn from these two charts?

First, that data is not neutral. It reflects the biases of the person who creates it. We need to treat historic comparisons with great care.

Second, that the future is inherently uncertain. Even when one outcome looks probable, we should be prepared for the possibility that we are wrong. Hope for the best and prepare for the worst is a good mantra.

But third, that while history does not repeat itself, it does rhyme. The closeness of the fit of the two lines in the second chart is compelling. It does not mean that they will continue to track each other but it is an indication of what might happen. At the very least, it argues for a well-diversified portfolio that would not leave you with raging FOMO if the gold price did accelerate again.

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