People have had a fascination with gold for thousands of years. Archaeologists have discovered gold jewelry in Southern Iraq dating to 3000 BC and gold ornaments in Peru dating to 1200 BC. The ancient Egyptians were masters in the use of gold for jewelry, ornaments, and economic exchange. By 1000 BC, squares of gold were a legal form of money in China. The Romans issued a popular gold coin called the Aureus (aureus is the Latin word for gold). By 1100 AD, gold coins had been issued by several European countries. Gold has been a highly sought-after asset all over the world and has always retained at least some economic value over thousands of years.
The United States has had a very chaotic history with gold. For example, in the Great Depression, President Franklin D. Roosevelt banned the export of gold and ordered U.S. citizens to hand in all the gold they possessed. It was not until the end of 1974 that the ban on gold ownership by U.S. citizens was lifted. By 1986, the U.S. government’s attitude on gold ownership had completely turned around, as evidenced by the resumption of the U.S. Mint’s production of gold coins with the American Eagle. However, U.S. investors have little more than 30 years of gold-investing experience. Figure shows how the price of gold per ounce has changed since 1974.

These end-of-December prices do not illustrate the true magnitude of the price bubble in gold prices that occurred in 1980. The price of gold increased from $512 at the end of 1979 to a peak of $870 on January 21, 1980. The subsequent crash in the price of gold was just as spectacular. The annual returns of gold are shown in Table 4.5. Gold prices have been very volatile, increasing dramatically for one or two years and then experiencing significant declines the next year or two.

a. Compute the rate of return in gold prices that occurred during the three weeks between the last day of 1979 and the January 21, 1980 peak.
b. By the end of 1980, gold had dropped to $589.75 per ounce. Compute the rate of return from the peak to the end of 1980.
c. Imagine that you invested $1,000 in gold at the end of 1999. Use the returns in Table 4.5 to determine the value of the investment at the end of 2012.

  • CreatedSeptember 23, 2014
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