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Chart of the Week

Tuesday
Aug162016

Week 33, 2016: price of gold vs. equities

Summary: Had they invested in August 2006, investors in Gold have would have received a return of over 100%, whereas investors in UK equities (as measured by the FTSE 100) would have received less than their initial investment. The divergence in the prices of Gold and equities has been consistent since the onset of the financial crisis, when demand for Gold as a safe haven investment increased substantially.

What does the chart show? The red line shows the FTSE 100 index (the index of the top 100 stocks on the London Stock Exchange), in US dollar terms (since the majority of companies listed are international), at the end of each month, indexed so that Aug 2006 is equal to 100.  The blue line is the dollar price of a kilogram of gold, also indexed in the same way.

Why is the chart interesting? The chart highlights the different levels of returns achieved by investors in gold and the FTSE 100 over the past 10 years. In US dollar terms, the FTSE 100 remains below its August 2006 level, whereas the price of Gold is still well over double its 2006 level. 

After continuing to rise throughout late 2006 and early 2007, the price of the FTSE 100 started falling in late 2007 and eventually lost half of its August 2006 value. While large reductions in equity markets have been common during recessions, the lack of returns from the FTSE 100 over a 10 year time horizon is unusual historically.

The onset of the financial crisis saw the price of Gold increase sharply in 2008. The rally in Gold lasted until early 2011, when the price of Gold peaked at over three times its 2006 level. This was largely attributed to investors seeking a safe haven to deposit capital amidst high levels of uncertainty in other asset classes, including equities, following the financial crisis. These patterns illustrate that, although the UK's economy has long since returned to growth, the impact of the financial crisis on the price of these assets is still apparent almost 10 years later.