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Can gold give 400% returns in 3 years? - Views on News from Equitymaster
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  • Jul 16, 2012

    Can gold give 400% returns in 3 years?

    Did you ever get the feeling that most things in life are not uniformly distributed? If you did then let us tell you that you are not alone. A gentleman by the name of Pareto got a similar feeling when he observed that around 80% of Italy's wealth belonged to only 20% of its population.

    Soon, this idea was extended to other disciplines and appeared to have shown the same set of results. Like how 20% of the effort creates 80% of the result. Or how 20% of the customers create 80% of the revenues and so on.

    Please bear in mind that the idea is not to have the exact 80/20 relationship in all the cases. In fact, it is just an approximation about how most things seem to be distributed unevenly. And about how not all things contribute equally to an effort, a handful of them contribute much more than the others.

    Thus, this rule, over time, came to be known as the Pareto Principle or the 80/20 rule.

    Is the Pareto principle applicable in investing too? We do think so. A thorough look at price movements of stocks and other commodities do suggest that some sort of Pareto principle is at work here. We routinely observe that majority of the stock price fluctuations takes place in a very short window of time.

    To explain in Pareto terms, nearly 80% of the stock price movements seem to take place in 20% of the time. This is the reason that timing the market seems to be a losing long term proposition. Identifying that portion of the time period where 80% of the stock price movement takes place is indeed difficult.

    Thus, the idea is to keep holding the stock if it is undervalued and then wait for the price to go up in Pareto fashion.

    A leading financial portal has made some interesting use of the Pareto principle we believe. And that is to identify the price of gold few years down the line. It has asked us to imagine that the current gold bull run which started way back in August 2001 represents 80% of the time period and 20% of the increase in gold price.

    It then follows that by August 2015, which would represent the remaining 20% of the time, gold's price could well rule at more than US$ 8,000. This would take the yellow metal more than 5 times higher than the current price.

    Gold certainly may or may not go that high by 2015. But there is every possibility that it breaks new price records in the coming years. Plus, improving fundamentals may not be the only reason behind gold price rise.

    Once we consider the fact that both buying as well as selling tends to go overboard once a certain trend is established, the possibility of the yellow metal going up substantially within a short time period is certainly on the higher side.

    Who knows, the Pareto principle may well turn out to be correct ultimately.

      Rahul Shah (Research Analyst), Managing Editor, Microcap Millionaires has led the team from the front in developing some of our most stringent and rewarding research processes. As per his own admission, the turning point in Rahul's life as a financial analyst came a few years back when he got introduced to the works of Warren Buffett and Charlie Munger. From Buffett, he understood the value of investing in good quality business with powerful moats and strong management teams. Charlie Munger on the other hand inspired him to be a lifelong learner and use mental models in order to arrive at the crux of matters across most disciplines. Rahul firmly believes that in order to be successful at investing, you have to do the big things right and possess a great temperament and a contrarian streak.



    Equitymaster requests your view! Post a comment on "Can gold give 400% returns in 3 years?". Click here!

    10 Responses to "Can gold give 400% returns in 3 years?"


    Aug 21, 2012

    Why not?. The possibility cannot be ruled out.With industrialization prosperity is increasing and gold purchase has two things.One its ornamental value and two the view that it is always safe investment bet.Now Chinese are buying more gold than Indians.



    Aug 13, 2012

    Dear all,
    I believe that gold can move near 400% in coming years.
    Why ? The answer is front of you my dear's means current scenario tells that it is possible.



    Jul 31, 2012

    Absoluted nonsense.



    Jul 25, 2012

    i think equity master wants to sell its gold thats y this lucrative report on gold..

    Like (1)


    Jul 25, 2012

    A really ridiculous theory. The way to look at the 80/20 rule is that assuming the bull run started in Aug 2001, 80% of the gains till date should have happened in 20% of the same time period. What's special about the Aug 2015 date? Why not Aug 2020 date instead. Using the rule to "predict" the future is the craziest thing I've ever come across at equitymaster.

    Like (3)


    Jul 24, 2012

    There are many financial blogs, projecting gold at $5000 to $10000 an ounce in near future !. Hope the future happens now!

    Like (1)


    Jul 24, 2012

    Feel the Hypothesis is ill conceived.

    Like (1)


    Jul 18, 2012

    I agree that you better avoid such articles.

    Like (3)


    Jul 17, 2012

    Eq Master - please dont compete with Rediff.. that is the site famous for publishing this kind of baseless non-sense articles.. One dust bin is enough to spend our time, you please dont create one..

    Like (4)


    Jul 16, 2012

    While the 80/20 principle brings a lot of value in decision making and analysis, I'm at a loss in understanding the point of this article. Lets take the assumption the other way around and assume that the gold bull period starting from August 2001 represents 80% of price increase and 20% of time period, then it reverses the whole theory. In that case, gold bull cycle is all done, right?
    It is below Equitymaster standards to publish such articles. You have many followers and unfortunately, few will buy gold because of this article...was that the intent of this article?

    Like (6)
    Equitymaster requests your view! Post a comment on "Can gold give 400% returns in 3 years?". Click here!

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