W.8_Lilly Wasitova_Gold Price as Stable Reference Value?


Problem Statement

With the problem posted earlier in my Blog #4, regarding the cost on my daughter’s study in university is to be projected using the gold value to the time after she finishes her study, since currently the currencies are not stable enough to be used as future projection. From previous Blog, the options are as below:

University Selection (calculation made in January 2011)
Attributes

Indonesia

Overseas

Jakarta

Bandung

US

Europe

State U

Private U

State U

Private U

Germany

Switzerland

Tuition Fee/Year*

7.000 EUR

20,000 EUR

6.000 EUR

15,000 EUR

56,000 EUR

1,000 EUR

10,000 EUR

Cost of Living/month

300 EUR

300 EUR

300 EUR

300 EUR

375 EUR [3]**

600 EUR

800 EUR

Study Duration

3-4 years

4-5 years

3-4 years

4-5 years

4 years

5-6 years

4-5 years

Accumulative Cost Of Living with maximum duration

EUR 14,400

EUR 18,000

EUR 14,400

EUR 18,000

EUR 18,000

EUR 43,200

EUR 48,000

1.00 EUR = 1.46349 USD  [5]
Accumulative Living Cost

USD 21,074

USD 26,343

USD 21,074

USD 26,343

USD 26,343

USD 63,223

USD 70,248

Table 1 : Study Cost for Various Universities

Alternative Solutions

The future gold value as reference can be obtained by regressing the valid Gold Price data, by using the reference of gold price per ounce from [3] for the year 1985 to 2010 and [4] for the average price in year 2011 to date as the reference to evaluate the projection/regression accuracy. The projection can be done by using the most suitable Trend Line once the data is plotted. The data from [3] gives us the following table:

Year

Price per Ounce [USD]

Year

Price per Ounce [USD]

1985

317.00

1999

278.98

1986

368.00

2000

279.11

1987

447.00

2001

271.04

1988

437.00

2002

309.73

1989

381.00

2003

363.38

1990

383.51

2004

409.72

1991

362.11

2005

444.74

1992

343.82

2006

603.46

1993

359.77

2007

695.39

1994

384.00

2008

871.96

1995

383.79

2009

972.35

1996

387.81

2010

1,224.53

1997

331.02

1998

294.24

Table 2 : Gold Price from Year 1985 – 2010

Selection Criteria

Trend lines possible to choose are:

  • Exponential
  • Linear
  • Logarithmic
  • Polynomial
  • Power

Selection of the preferred alternatives

After plotting all trend lines and considering a data fluctuation, the selection goes to the 3rd Order Polynomial Tend Line, since this one is considered as the most suitable and accurate enough since the R2 coefficient is 0.9792. This is close enough to R2 of 1.0, which indicates that the regression line perfectly fits the data. Figure 1 showing the graphical illustration as below:

Figure 1 : Gold Price Between 1985 -2010 and its Trend Line

Analysis and Comparison of Alternatives

Doing the extrapolation from the year 2011 to the year 2020 using the given formula from Excel as below:

y = 0.30356x3 – 1,816.11115x2 + 3,621,718.30613x – 2,407,481,471.19924

is giving us the following tables for the future values prediction, and as plotted in the Graph (Figure. 1)

YEAR

Predicted PRICE per oz [USD]

2011

1,518.29

2012

1,768.16

2013

2,050.41

2014

2,366.85

2015

2,719.29

2016

3,109.57

2017

3,539.51

2018

4,010.92

2019

4,525.63

2020

5,085.46

Table 3 : Gold Price Extrapolated from Year 2011 – 2020

Using the data for the average Year 2011 Price from [4] to be compared to the extrapolated value of 2011 gives us the comparison as per below table and a difference of 5.84%, which makes the extrapolation value good enough to be used as reference.

YEAR

PRICE per oz [USD]

2011 from [4] average

1,429.67

2011 Extrapolated

1,518.29

Table 4 : Comparison value from data vs. calculated

Selection of the preferred alternatives

Using the future Gold Value as calculated in the Table 3 for the calculation of the future Cost of Living for my daughter’s University Study, will give the following table:

Attributes

Indonesia

Overseas

Jakarta

Bandung

US

Europe

State U

Private U

State U

Private U

Germany

Switzerland

1.00 EUR = 1.46349 USD
Accumulative Living Cost

USD 21,074

USD 26,343

USD 21,074

USD 26,343

USD 26,343

USD 63,223

USD 70,248

Accumulative Living Cost Using Gold Price Reference

USD 30,900

USD 41,690

USD 30,900

USD 41,690

USD 38,625

USD 107,946

USD 111,175

INCREASE

46.62%

58.26%

46.62%

58.26%

46.62%

70.74%

58.26%

Table 5 :Comparison of calculated Cost of Living

Performance Monitoring & Post Evaluation of Results

From the calculation, it is showing an over 10% increase every year that makes unbelievable figures that needs further study on how the market will response to this kind of future Gold Price prediction, since this will affect not only the cost of living showed in this case study but also in all aspect of living and trading.

References:

  1. Sullivan, William G., Wicks, Elin M. & Koelling, C. Patrick (1942), Engineering Economy 15th Edition, Singapore: Prentice Hall, Inc.
  2. Michael Bassard & Diane Riter (2010), The Memory Jogger 2nd Edition, Canada, GOAL/QPC
  3. HISTORICAL GOLD PRICES- 1833 to Present
    http://www.nma.org/pdf/gold/his_gold_prices.pdf
  4. KITCO http://www.kitco.com/scripts/hist_charts/yearly_graphs.plx
  5. XE, The World’s Favorite Currency Site http://www.xe.com/ucc/
  6. John K. Hollmann, PE CCE (2006), Total Cost Management Framework, A Process for Applying the Skills and Knowledge of Cost Engineering 1st Edition, USA, AACE International – The Association for the Advancement of Cost Engineering


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About Lilly Wasitova

Goal oriented professional who like to have fun
This entry was posted in Lilly Wasitova, Week #8. Bookmark the permalink.

One Response to W.8_Lilly Wasitova_Gold Price as Stable Reference Value?

  1. DrPDG says:

    AWESOME, Bu Lilly!!! You got it…… (took you long enough, but you got there eventually!!)

    For ANYONE doing estimating into the future (and by definition, aren’t all projects planned into the future?) this is an ESSENTIAL skill set to master.

    And actually, you could do a follow on analysis (another posting) of what is likely to happen to the EURO (and the dollar!!) vis a vis the RUPIAH!!.

    Folks, what I am trying to teach you here (“Applied Engineering Economics”) is so essential that I believe it to be a life skill- that is it should be taught in high school as well as a required course in all university programs. Why? Because the fundamentals impact each and every one of us in our daily lives.

    Keep up the good work, Bu Lilly and now as the Program Manager and trusted leader, you need to drag our “resident Bule” along!!! The strong help the weak!!

    BR,
    Dr. PDG, Jakarta

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