Impact of Gold On Economy

An Introduction
G old is a rare metallic element with a

melting point of 1064 degrees centigrade
and a boiling point of 2808 degrees centigrade.
Its chemical symbol, Au, is short for the Latin
word for gold, 'Aurum', which literally means
'Glowing Dawn'. It has several properties that
have made it very useful to mankind over the
years, notably its excellent conductive
properties and its inability to react with water
or oxygen.
The word gold appears to be derived from
the Indo-European root 'yellow', reflecting
one of the most obvious properties of gold.
This is reflected in the similarities of the word
gold in various languages: Gold (English), Gold
(German), Guld (Danish), Gulden (Dutch), Goud
(Afrikaans), Gull (Norwegian) and Kulta
(Finnish).
1 IMPACT OF GOLD MARKET ON ECONOMY

WHAT IS A CARAT?
A
Carat (Karat in USA & Germany) was
originally a unit of mass (weight) based
on the Carob seed or bean used by
ancient merchants in the Middle East. The
Carob seed is from the Carob or locust bean
tree. The carat is still used as such for the
weight of gem stones (1 carat is about 200 mg).
For gold, it has come to be used for
measuring the purity of gold where pure gold is
defined as 24 carats. How and when this change
occurred is not clear. It does involve the
Romans who also used the name Siliqua Graeca
(Keration in Greek, Qirat in Arabic, now
Carat in modern times) for the bean of the
Carob tree. The Romans also used the name
Siliqua for a small silver coin, which was
one-twenty-fourth of the golden solidus of
Constantine. This latter had a mass of about
4.54 grams, so the Siliqua was approximately
equivalent in value to the mass of 1 Keration or
Siliqua Graeca of gold, i.e the value of 1/24th of
a Solidus is about 1 keratian of gold,i.e,1carat of
gold.

WORLD GOLD MARKETS
 London as the great clearing house
 New York as the home of futures trading
 Zurich as a physical turntab
 Istanbul, Dubai, Singapore and Hong
Kong as doorways to important consuming

regions.
 Tokyo where TOCOM sets the mood of

Japan
 Mumbai under India's liberalized gold

regime

Objectives of the study
The financial asset market – stock market,
bond market and currency market has become
increasingly notorious. Gone are the days when
US Economy controlled the entire world
economy. Even the US$ has shed significantly
against all major currencies. Various countries
are now increasingly shifting their reserves
from Dollars ($) to Gold.
The objective of the project study may be
highlighted as follows:
 To study the techniques of pricing gold in the
Indian markets and factors affecting the same.
 To analyze whether the upward trend in the
Gold market will tend to continue forever….
 To study the impact of retail jewelry on the
Gold Market and its prices.
 To study the impact of ETF and Gold ETF on the
Global Gold Markets.
 To study the impact of Gold Value rising and
replacing $ and interference by US economy.
 To answer various questions like how to trade
in Indian Gold Market, investment strategies,
gold as a hedging tool, etc.

Methodology and its
limitations
The project is a detail study of the Gold
Market of India as well as its relevance in the
International Market. There have been various
small areas that have been taken into
consideration in the preparation of the project.
The initial idea about the prevalent gold
market is through extensive internet surfing,
magazines from institutes like ICFAI and
newspaper articles. There have been verbal
interactive sessions with people dealing in Gold
Market like retail jewelry shop owners and
people dealing in commodity market. The
various findings and observations have then
been compiled together and divided into broad
headings for the ease of the study and to help
the fulfillment of the objectives.
The main constraint in the preparation of the
project was time. The project had to be worked
in a very short span of time. Moreover
appointment with Risk Managers and Financial
Experts, for collection of Primary Data was not
possible.

Introduction to Indian
I
Market
ndians have a huge fascination for gold. This is
evident in the fact that India is the largest
consumer as well as importer of gold in the
world. Gold plays a very important role in the
social, religious and cultural life of Indians.
India Gold Market looks poised to achieve
greater heights given the fascination for gold in
the country. India consumes about 800 MT of
gold which accounts to about 20% consumption
of gold globally. More than 50% of this is used
for making gold jewellery.
The domestic India gold market is estimated
to be more than US$15 billion and is expected
to rise significantly in the coming years. During
April 2008 to February 2009, gems and jewelry
worth US$ 17.79 billion was exported from the
country. United Arab Emirates imported more
than 30% of gems and jewelry from India,
making it the largest importer from the country.
Hong Kong was the second largest importer
with 25% followed by United States with 20%.
The gem and jewelry industry accounts for
more than 10% of India’s total commodities
exports.
POINTS TO BE NOTED:
Gold is valued in India as a savings and
investment vehicle and is the second
preferred investment after bank deposits.
India is the world's largest consumer of

gold in jewellery as investment.
In July 1997 the RBI authorized the

commercial banks to import gold for sale
or loan to jewellers and exporters. At
present, 13 banks are active in the import
of gold.
This reduced the disparity between

international and domestic prices of gold
from 57 percent during 1986 to 1991 to
8.5 percent in 2001.
The gold hoarding tendency is well

ingrained in Indian society.

Domestic consumption is dictated by
monsoon, harvest and marriage season.
Indian Jewelry off take is sensitive to
price increases and even more so to
volatility.
In the cities gold is facing competition

from the stock market and a wide range
of consumer goods.
Facilities for refining, assaying, making

them into standard bars in India, as
compared to the rest of the world, are
insignificant, both qualitatively and
quantitatively.

SIZE OF INDIAN GOLD
MARKET
T
he domestic India gold market is estimated to
be more than US$15 billion and is expected to
rise significantly in the coming years. During
April 2008 to February 2009, gems and jewelry
worth US$ 17.79 billion was exported from the
country. United Arab Emirates imported more
than 30% of gems and jewelry from India,
making it the largest importer from the country.
Hong Kong was the second largest importer
with 25% followed by United States with 20%.
The gem and jewelry industry accounts for
more than 10% of India’s total commodities
exports.
GOLD INVESTMENT
T
MARKET IN INDIA
here were also some concerns raised on the
disproportionate gold consumption pattern in
India versus the US. “Though India is the largest
consumer of gold, its annual per capita
consumption is half of that in the United States,
as Indians invest mainly in the physical form of
gold,” World Gold Council (WGC) Associate
Director Keyur Shah said. According to WGC’s
‘Gold Demand Trends’ report, released by
precious metals consultancy GFMS, total
identifiable tonnage demand for gold fell 19
percent in the second quarter of 2008 to nearly
736 tonnes, but in value terms it rose nine
percent to a record level of over $21 billion.
Second quarter jewelry demand was the
biggest contributor to the overall decline, falling
24 percent to 504 tonnes. In the first quarter,
the total identifiable tonnage demand for gold
fell 16% to 701 tonnes, the lowest quarterly level
on record since 1993.
“Jewelry has been and is the bedrock of the
gold industry, and we see that the willingness
to buy jewelry is at a very high level as the
consumers have started to think prices will
increase further. But imbalances in the market
suggest that sooner or later the gold price will
have to fall,” said Walker.

CHANGING FACE OF
RETAIL JEWELRY
A
s Dow Theory Letters’ Richard
Russell once said, “It’s not about
what the price of gold is, it’s
about how many ounces you have.”
Tanishq’s vice president, V
Govindraj, shared some experiences
with retailers on selling more ounces to their
customers, and how they can revolutionize their
businesses by putting in minor but significant
efforts. He also explained the importance of
making differentiation points in designs to make
this aspect a unique selling point.
Interestingly, he also raised a point on the
industry’s need to create more means of
marketing, akin to creating new celebration
days like Mothers Day and Raksha Bandhan.
“The retail space also should seduce the
customer, giving them the enjoyment of
shopping. Products need to tell a story, and the
product display too should communicate with
the customer. Mean-while, retailers should
create an interest among consumers through
print, and outdoor banners. The best way to

predict our future is to invent it,” Govindraj
said.
A
INDIAN STAND
ccording to the World Gold Council, India is the
world’s largest market for gold jewellery. In
accordance with the global financial crisis,
Indian stock market has also witnessed its
worst hits in the last one month. The price of
gold has been volatile with big swings. In spite
of fluctuations in price, gold has consistently
regressed to its historic purchasing power
parity with other commodities and intermediate
products.
The high uncertainty in the financial

markets together with the fall in gold prices
enhanced the collections of the five listed gold
ETFs in the country by 14 per cent in the month
of August. Rajan Mehta, Executive Director,
Benchmark AMC, said, “Although a 14 per cent
increase on a small base may not seem that
significant, collections have gone up by 100 per
cent in just a year’s time.”
The Assets Under Management (AUM)
for the five ETFs have risen to Rs 650 crore
in August from Rs 547 crore in July. Average
volumes in gold ETFs have increased by 111.12
per cent to 50,080 units per day in the last nine
months. Analysts say that the demand for
traditional gold jewelry is declining as an
investment channel; instead, trade in paper
form has more than doubled since January
2008.
In the light of fall down of equity
markets, investors realized that they need to
have at least 10-15 per cent of their portfolio in
gold. As a result, number of retail investors is
growing. Besides, though gold has been volatile
recently, the underlying trend is for it to
rise. So, analysts say, it is better for investors
whose portfolios include gold, to keep holding
on to it.

HOW TO TRADE IN
INDIAN GOLD MARKET?
T
he price of gold depends on a host of
factors, which makes it very difficult to
predict. In a fashion similar to shares,
gold is an asset class by itself. In fact, in many
villages and small towns of India, gold is
preferred to bank deposits as a savings and
investment instrument.
Till a year ago, to gain from price volatility, one

would have to hoard and trade in gold
physically. Not any more, however. With the
commodity futures market operating in full
swing, one has the option of not physically
stocking gold to gain from its price movements.
Let us see how trading in futures is better than

the option of hoarding gold. Firstly, there are
several costs associated with the process of
physically stocking gold. The costs include the
cost of the gold itself, the cost of carrying, cost
of physical storage, finance cost and last, but
not the least, the safety element.

While futures might have some advantages,
there is also a danger of losing big as your risks
are also magnified and hence, one must tread
carefully in this area.
In this context, if the going cost of gold is Rs

6000 per 10 grams, with an investment of Rs 6
lakh, one can buy 1kg of gold. Now, suppose,
three months hence, when the going price of
gold is Rs 6,500 per 10 grams, the person
decides to sell the gold. The gross profit made
by the person is Rs 500 for every 10 grams and
hence, for 1 kg, it stands at Rs 50,000. To arrive
at the net profit, one would have to deduct the
cost of financing; the cost of storage in a bank
and transaction costs, including sales taxes.
Now, let’s see what the same Rs 6 lakh can

achieve in a futures market, assuming the same
sequence of prices. In Indian exchanges,
currently, futures contracts up to four months
are available. Let’s assume that three-month
gold futures are trading at a little over the spot
price, with the market expecting gold prices to
remain stable over the next three-month
period. Let this price be Rs 6050.
Since a futures contract is an obligation to buy

or sell a specific quantity of the commodity, one
does not have to pay for the entire value of the
commodity. Buying futures obligates one to
take delivery of the underlying commodity at a
particular date in the future. This is also known
as taking a long position.
To trade in gold futures, one has to go to a

brokerage house and open a trading account. A
trading account involves keeping an initial
deposit of Rs 50,000 to Rs 1 lakh. Part of the
money accounts for the margin money, which is
required by the exchange when one enters
trading.
For a high amount, however, the deposit

amount is usually waived by the brokerage
house. The whole investment is then generally
treated as margin money. For commodity
futures, there is usually a lot size or the
minimum volume of the commodity of which
one has to buy a futures contract.
Let’s assume, for our case, the minimum lot size

is 1 kg (lot sizes are usually 100gm or 1 kg).
Thus, if the going futures rate is Rs 6,050 per
10 grams, the minimum value of a contract is
Rs 6,05,000. The beauty of a futures contract is
that to trade in them, one has to only invest the
margin money. If we assume a flat 5% margin
rate for the contract (margin rates vary from 5-
10%), the margin money for a single lot is Rs
30,250. Add to that, a brokerage amount, which
is usually .1% to .25% and some start-up
charges. Applying these rates, which are
prevalent in the market currently, a single lot of
gold futures contract, should come at around Rs
32,000.
Thus, with Rs 6 lakh, one can buy 19 lots of

gold futures. One can , however, expect ‘margin
calls’ from brokerage houses if the margin
money falls short of the margin money required
for trading in the exchange, determined at the
end of the trading session each day.
Now, suppose that at the end of 3 months, the

spot price of gold actually reaches Rs 6,500 per
10 grams.
The novelty of the futures market is that as long

as there is sufficient liquidity in the markets,
the futures price always converges to the price
of the under lying. Such is the leverage of
futures, that with the same investment of Rs 6
lakh, one is actually commanding 19 lots of gold
futures or in effect, 19 Kgs of gold.

Thus, at the end of three months, assuming the
above-mentioned course of events, on an
investment of Rs 6 lakh, one can make a gross
profit that is almost 17 times the profit made by
physically stocking gold.
At the same time, the downside risk is also

multiplied. To avoid the hassles of delivery, one
must offset the futures contract just before the
maturity date is reached. Delivery would entail
gold certification and accreditation by an
exchange-appointed assayer and increased
transaction costs in general, as various taxes
come into the reckoning.
The above example is about a case of taking a

bullish view on the price of gold and hence,
gaining from the price rise by buying futures.
One can gain from a futures market even by
having a bearish view on the price of gold. This
aspect of gain is absent in the physical market
for gold. If one believes that the spot price of
gold is going to fall in the near future, all he
needs to do is to sell gold futures.
While all this seems pretty rosy, there are some

things to be kept in mind. Firstly, any
transaction in the futures market is possible
only if counterparty to whom the buy or sell
order that is placed, exists. For unusually large
investments, the exchange may find it difficult
to find counterparty and so it may take some
time to match it. Also, with any futures, there
may be a problem in exiting from a position by
buying or selling when one would like to.

ETF & GOLD
ETF
O
ut of the several options available for
investing in gold, Gold ETFs is the
recent avenue. An Exchange Traded
Fund (ETF) is an open-ended fund that
can be traded like a share on a stock exchange.
It is a collective investment scheme that invests
in a combination of asset classes. Consequently,
prices are determined by the value of the assets
the ETF holds.
In Gold Exchange Traded Fund, the principal

asset is exclusively gold bullion, and not a
basket of stocks as is the case of equity ETFs.
Gold ETFs are shares or units of gold that are
owned by investors and are fully backed by gold
bullion bars held by a custodian. They can be
used for speculating in the short-term for
betting on the price of gold, or they can be used
for long-term investing.

Gold ETFs allow investors to buy gold in small
increments. In the international market, one
unit stands for one-tenth of an ounce (28.35
grams) of fine gold. The value of a unit moves
in harmony with the price of gold. Similar to
mutual funds, the value per unit is the total
value of the gold held divided by the number of
units minus the expenses of the fund. Just like
any share, Gold ETFs, can be traded and bought
by investors through their stockbrokers.
POINTS TO REMEMBER
Objective of the GOLD ETF is to generate
returns that closely correspond to the
returns provided by in vestment in physical
gold in the market (domestic market),
subject to track in g error.
After the closure of NFO, the Units of the

Scheme are listed on the Capital Market
Segment of NSE or any other Stock
Exchange. The Units can be purchased /
sold in the stock exchange like any other
publicly traded stock. (unlike other open-
ended schemes which can be
purchased/redeemed in MFSS of NSE or
StAR MF of BSE)
Units of the Scheme are available only in
Electronic (dematerialized) form.
Authorized Participant means the member

of the National Stock Exchange of India
Ltd. (NSE) or any other Stock Exchange(s)
and their nominated entities/persons or
any person who are appointed by the
AMC/Fund to act as Authorized Participant.
Creation Unit is fixed number of Units of

Scheme which is exchanged against a
predefined quantity of physical gold (of
prescribed purity) called ‘Portfolio Deposit’
and ‘Cash Component.’
After the NFO, units in less than Creation

Unit Size cannot be subscribed/redeemed
directly with the Fund. Authorized
Participants and Large Investors can
subscribe or redeem the Units of the
Scheme directly with the Mutual Fund only
in Creation Unit Size at applicable NAV in
exchange of Portfolio Deposit and Cash
Component.
In addition to purchase and sale of Units

on Stock Exchange, Authorized
Participants and Large Investors can
directly subscribe to or redeem the Units
of the Scheme with the Mutual Fund in
Creation Units size at NAV based prices.
Authorised Participants and large
Investors may in vest in the fund by way
of physical gold also.
The price of the Units on the exchange

depends on demand and supply at that
point of time and underlying NAV and the
units may trade at premium/discount to
the NAV.
Each Unit normally have a face value of

Rs.100/- each and mostly, each unit is
approximately equal to price of 1 (one)
gram of gold
If there is in sufficient liquidity in the

secondary market on the Stock Exchanges,
the AMC may, at its discretion allow
redemption of units in other than Creation
Unit size.
Domestic price of Gold = (London Bullion

Market Association AM fix in g in US $
/ounce) X (conversion factor for convert in
g ounce in to k.g. for 0.995 f in eness x
rate for US$ in to INR) + (custom duty for
import of gold) + (sales tax / octroi and
other levies applicable.)
Tax treatment of Gold ETF – Similar to
Debt funds.
Authorized Participants and Large

Investors have a choice of in vest in g
through 1 kg gold per application and in
multiples of 1 KG gold thereafter

GOLD ETF - TO HEDGE
YOUR PORTFOLIO
Nov 14, 2008
"It is the greenback which is unstable, and not
bullion”
- Dr. Franz Pick (Austrian economist and
currency expert)
T
he recent financial turbulence centered in
the US has engulfed emerging financial
markets. The global meltdown has
affected huge amounts of shareholder wealth.
It has literally devastated fortunes of all kinds
of scrip, be it a large-cap, mid-cap or small-cap.
Everything was so uncertain.
The years of boom had trembled. The

magical figures of market capitalizations of
various companies reached below their real
value. The giants in the financial services
industry worldwide, like Lehman Brothers, City
Bank tumbled amid the sub-prime fiasco.
Equities tumbled worldwide. The relative

worth of Greenback has concerned global
commodity markets. Nevertheless, regardless

of recent hiccups, gold has remained as most
popular investment. The uncertainties of the
stock market have spawned the demand for
investments in the yellow metal.
Gold is a hedge against all kind of un-

certainties, be it global slowdown or
geopolitical risk. Over the past 2-3 years, global
growth rates have averaged over 5.0%
consistently. China and India have led the
charge for global growth, and there is
competition among various countries to
maintain high growth rates. There will be
situation wherein growth rates may fall, with
the slight possibility of dome of the weaker
countries getting busted. Gold demand by way
of ETF increased sharply between August 2007
and November 2007 after the US subprime
crisis. Gold is the best hedge not only against
global slowdown and readjustment but also
against geopolitical risk.
Gold, despite an occasional fall, is bound
to remain bullish due to the prevailing global
political and financial uncertainty.

A VIABLE OPTION
T
he mantra is, “Don't place all your bets on
one sector or asset class." To maintain
portfolios efficiently and to achieve better
returns, there should be diversification across
asset classes of a portfolio. Diversification
protects the portfolio against fluctuations in the
value of a single asset or group of assets.
Comprising assets with low volatility in a
portfolio will help decrease the overall risk.
Significantly, since gold is an asset class that

has negative correlation with the stocks, the
gold ETF units offer stability to the overall
return on the portfolio of investment. Preferring
Gold ETFs to physical gold either in the form of
bars, gold coins or jewellery eliminates the
hassles of handling the precious metal.
Furthermore, the quick and convenient dealing
through demat account and no issues of storage
and security make Gold ETFs stand apart from
other kinds of investing avenues in gold. All in
all, considering an option of diversifying the
portfolio with gold is as ‘good as gold’.

DETERMINATION OF
GOLD PRICES
 SUPPLY DYNAMICS:
U
ntil recently gold production was limited
to a few mines in South Africa, the US,
Australia and Russia. However, gold
mines now operate in more than 55 countries,
with China leading the race. Total supply in 2007
fell marginally by 1.6 percent, which comprised a
29 percent fall in supply from official sector sales
and a 14 percent rise in old gold scrap sales.
Mine production, which contributed the
majority 63 percent to total supply in 2007, fell
a modest 0.4 percent, pushing down total
output to an 11 years low.

FIG 6.1 : COMPARISON OF MINE PRODUCTION BETWEEN SOUTH AFRICA AND
CHINA. (SOURCE: GFMS)
Peru, South Africa and the US each suffered

losses of more than 10 tonnes, which was
somewhat compensated for by a 12 percent or
66 tonne-increase in Asia’s mine production,
supported primarily by China and Indonesia.
GFMS expects the mine production to remain flat
in 2008. A decline in the Indonesian and
continued losses in the south Africa are expected
to be broadly balanced by the Russian, west
Indian and Brazilian market. Official sales are
expected continue at levels similar to 2007. “Full
year figures will almost certainly be well up
year-on-year, although perhaps not quite
beating the 2006 total.” Increasing input costs
in South African mines have resulted in declining
production.
FIG 6.2 : ABOVE GROUND STOCKS OF GOLD. (SOURCE: GFMS)
“South African mines are all mostly

underground have rocks with high
temperature, the country produces a huge
amount of ice for cooling it, which leads to its
high input costs,” Walker said.
Meanwhile, Chinese production has
increased manifold due to low input costs.
“China, which was the eighth largest gold
producer in the 1990’s, has now taken over
South Africa and become the largest in the
world.”
Changing supply from above-ground
stocks is also one of the influencing factors
on gold prices. The above ground stocks of
gold were at 161,000 tonnes at the end of
2007, with the majority 52 percent comprising
jewelry, followed by 18% as official gold
holdings, 16% as private investments.
FIG 6.3 : POSITION OF GOLD HOLDINGS OF DIFFERENT COUNTRIES. (SOURCE:

GFMS)
 DEMAND DYNAMICS:

H
istorically, high prices and volatility
have had a dramatic impact on jewelry
demand. Some purchasing is expected on
dips, but at levels far lower than in 2007. Other
fabrication growth expected to feel the effects of
the slowdown in the global economic growth.
Investor interest in gold is expected to remain
strong throughout this year and potentially
through to early-2009.
“Gold demand has been steadily increasing

over the years, but fabrication demand is also
not the key driver in that. Perhaps, without
jewelry, gold prices would have probably been
around $100/oz,” Walker said.
In 2007, jewelry accounted for 79 percent of

the total global gold fabrication of 3,072 tonnes
Rising gold prices have resulted in lowering
demand from developed countries. However,
consumption is on the rise in developing
nations, with their demand standing at about
3,000 tonnes versus 1,000 tonnes from the
industrial countries in 2007.
FIG 6.4 : WORLD GOLD FABRICATION. (SOURCE: GFMS)

“Although the last four months saw a dramatic
inflow of funds into gold demand for the
rest of the 2007 was unimpressive. The 61
percent decline in implied net investments to
158 tonnes was largely driven by net selling
that took place in the over-the- counter
market,” Walker said.

FIG 6.5 : CHART SHOWING WORLD GOLD FABRICATION OF
DEVELOPING AND INDUSTRIAL COUNTRIES. (SOURCE: GFMS)

PRICE OUTLOOK
“As risk aversion has increased considerably
with no material signs of easing despite
intervention from monetary authorities, the
effects of the sub-prime credit crisis will continue
to provide a strong investment case for gold, ”
Walker said. He expected the interest rate
scenario in the US to put an already weak
currency under further pressure. Persistence of
the twin-deficits in the US will not prove of any
help to the dollar either. Although current
account deficit will improve with probable
decline in US consumer spending and recession,
the fiscal positions will deteriorate dramatically.
“The US federal budget deficit is set to soar
from an already poor level. An economic
slowdown and problematic financial markets
point to a further decline in equity prices and
hence, commodity prices in general are expected
to remain strong,” Walker said.
This along with continued investor interest will
be the principal driver of gold’s continued rally
to cross the $1,100/oz-mark. “In the
medium term prices could move sideways or
even retrace a little more; the mid-$800/oz is a
possible low for the rest of the year, with prices
below that level most likely to be bid up by
bargain hunting and stock replenishment,”
Walker said, adding: “Nevertheless, this is most
unlikely to occur in 2008 and potentially not
until well into 2009.”
GOLD PRICES – WILL THE

UPWARD TREND
CONTINUE??
Precious Metal Prices – The Issues Behind Present Rally
Decline in US economic growth and rise in

growth of other nations including Brazil,
Russia, India and China (BRIC) nations: Before
the start of 21st century most of the countries
were dependent on US retail demand for their
growth. Japan and other countries were also
dependent on US demand. Higher growth rates
and subsequently higher demands from China,
India and other nations have resulted in a
world less dependent on US economy for
growth. The world is now less dependent on
the US economy for growth than it was at the
beginning of the century.

Structural decline of US dollar and search for
investment away from the US dollar. The US
economy needs more than $2 bn a day of
foreign investments to run its economy. Its
trade deficit and budget deficit are on the rise.
Foreign investors are apprehensive of
investing in non-dollar investments. Even
retail investors are investing in instruments
which are not priced in US dollar. As a result,
emerging market equities like India, China are
witnessed continuous rise in foreign portfolio
flows.
Continuous rise in physical demand for gold
and lack of new mine supplies. Global
goldmine production peaked in 2003 and is
experiencing gradual decline currently. The
problems are perhaps best typified by the
world’s largest producer, South Africa, where
mines face declining ore grades and rising
costs as they push the extremes at depths of
2.5 miles down. In 1970, South Africa
produced 1000 tons of gold, but by 2007, it
had fallen to a quarter of this level. Where new
mines have been beset by red tape, resources
nationalism and AIDS (afflicting roughly a
third of mineworkers). In short, new deposits
are neither being found nor developed to
replace the ageing and largely depleted mines.

Indian gold demand is expected to rise
even as gold prices near $900 per ounce. The
start of gold futures trading in Shanghai stock
exchanges will result in a greater demand
from China. As the Chinese economy switches
to domestic demand-led growth from export-
led growth, the Chinese gold demand will rise.
The US subprime financial crisis had a direct
impact on the global gold market in the
quarter of 2007, as safe haven investors
spurred record inflows into gold exchange
traded funds helping to push total demand to a
new record of $20.7 bn, up 30% a year earlier.
Central bank diversification of Foreign
exchange reserves: Some of the central banks
have started to increase a portion of their gold
reserves and reduce a portion of their gold
reserves and reduce a portion of US dollar
reserves, namely China, Russia and some of
the oil producing nations. There are other
central banks, which have been steadily
increasing their huge foreign exchange
reserves away from the US dollar into gold and
non-US dollar currencies. Central banks
portray a macro picture of the things to come.
If they are increasing their gold reserves, why
should retail investors be left behind? It’s for
you to decide wisely.

Excess liquidity created by central banks to
ensure higher retail spending and higher
growth: The Federal Reserve Bank of Japan,
Bank of England and other central banks are
continuously cutting interest rates
consumption and growth. Interest rate cut
adds to money supply created implies too
much chasing too few investment and a rise in
value of hard assets including gold.
The Dollar Linkage: Financial markets are

responding to the US dollar decline and near
recession situation in the US economy by
switching their investment away from the US
dollar. Exporters of different currencies have
started billing their exporters in currencies
other than the US stocks and bonds, and are
increasing investments in commodities
including precious metals and soft
commodities as a hedge against the decline in
the US dollar. Even retail investors in the US
are reducing their US dollar-based
investments.
More and more countries are resorting to
liberal trade instead of multi-lateral trade,
which is not billed in the US dollars. India has
various free trade agreements wherein one
need not bill their exports or imports in US
dollar. We have the Indo-Thailand free trade
agreements. Other countries are increasing
bilateral trade which is beneficial to both the
countries involved. If financial markets all of a
sudden switch to the gold standards then
there will be global turmoil. Gold along with
the basket of currencies including Chinese
renminbi may replace the US dollar over the
coming years. However, the Federal Reserve
will not sit and see the decline of the US dollar.
It will take steps to stimulate the US dollar’s
decline. Whether such steps are successful or
not is something only time can decide.
Deflation-Inflation-Stagflation-Recession: This
is the cycle global economy follow. Globally,
we are in stagflation cycle. Higher commodity
and energy prices, including prices of food
grains have resulted in higher inflation and
lower growth in developed nations. Stagflation
implies high inflation and low growth. Gold
performs best under conditions of stagflation.
Commodity prices inflation is here to stay, as
demand pressure remains high.
Dollar v/s Gold: Changing equations- There is
a direct relationship between gold and a
weaker US dollar. Most of the metals and soft
commodities are quoted in US dollar. If the US
dollar declines, the net receivables of the
commodity producing nations also fall
(assuming commodity prices remain the
same). As the US dollar declines, commodity
prices rise as they are mostly quoted in US
dollars. Higher commodity prices lead to
higher inflation. This cycle will continue as
long as the US dollar continues to depreciate
and the world switches away from quoting
commodities in US dollar. Gold is the best
commodity against inflation.

GOLD: WILL IT REPLACE
THE US DOLLAR?
 GOLD AND US DOLLAR.
Gold prices rose to $846 an ounce in
November 2007 from $254 in 2001, which is
a 23%rise in nearly seven years. This is a
great return considering the risk involved.
Average annual price of gold has also been
rising. Gold has gained maximum against the
US dollar, which indicates US dollar’s plight in
the first decade of the 21st century.
It is also an indication that the “US
dollar is starting to lose its World Reserve
Currency Peg” which will be completed by
2010. US have been the key driver behind
global growth and consumption since 1960.
And, the dependence on the US dollar and US
economy also increased the value of US
dollar. Crude oil, billed in US dollar, further
added to the clout of greenback.
All this is about to change. Crude oil
may not be billed in US dollar after 2010.
There are crack appearing in OPEC and the
Middle East coalition of nations over the

billing of crude oil in US dollar. How long can
US and its allies attack nations which bill
crude oil in a currency other than US dollar?
Iran, Nigeria, Venezuela is all on the radar of
the US government as they try to bill crude oil
in other currencies. More wars imply more US
dollar bashing and greater value for gold.
Investing can be broadly classified into:
hard asset and paper assets. Gold is a hard
asset, while paper assets include equities,
bonds, etc. Technology has also created more
paper assets, as investments can be made
even through the internet. Gold is also in the
form of paper asset when investment in gold
is done through the futures markets,
Exchange Traded Funds (ETF), gold stocks
and gold bonds. Exchange traded funds are
backed by physical gold.
 CENTRAL BANK AND GOLD.

Most of the central banks, including India’s,
are holding gold reserves as a hedge against
any fiscal crisis. In India, in 1991, the
Narasimha Rao government had taken a loan
against gold to tide over Indian fiscal crisis,
which ultimately led to the opening up of the
Indian economy.
According to the International Monetary
Fund, official gold reserves (including those
of the IMF and the BIS) amounted to around
35580 tons at the end of 1990. At end of
2006, this had reduced to around 30380 tons,
a 15% fall. A major portion of the 5200 tons
reduction was due to sales by European
central banks, notably by the signatories to
the Central Bank Gold Agreements (CNGA 1
AND CBGA 2) whose reported holdings were
collectively reduced by around 4870 tons
(although this figure may be distorted by gold
swaps and by the institutional changes
consequent on the introduction of the euro).
Over the period, a majority of other central
banks kept their gold reserves more or less
stable. Some reduced their reported reserves
and others increased them.
Some of the central banks (for example,
that of China, Russia and a few oil-producing
nations) have started to increase their share
of gold reserves and reduce their US dollar
reserves. China had 700 tons of gold
reserves. China had 700 tons of gold reserves
at the end of September 2007 or just 0.90%
of total reserves (up from 105 tons at the end
of 2001). Russia had 407.50 tons of gold at
the end of September 2007 or just 2.10% of
reserves up from 317 tons at the end of 1993.
A few other central banks have been steadily
increasing their huge foreign exchange
reserves in gold and in currencies other than
US dollar. Central banks portray a macro
picture of the things to come. If they are
increasing their gold reserves, why should
retail investors be left behind? It’s for you to
decide wisely.
 GOLD : DEMAND AND SUPPLY.

Unless new gold mines are found in the
coming years or some of the major central
banks (including Federal Reserve) sell gold,
there will be a shortage of gold. Further, the
cost of extracting gold is also rising.
As far as supplies are concerned, in 2006,
the mine output was more or less unchanged
at 2473tons, while the total gold supplies in
2006 (including producer price hedging,
central bank sale, and scrap sales) stood at
3557tons. In 2006, the total gold demand,
including jewelry and ETF demand, was at
3386 tons. At the moment, there is still a
marginal surplus. Gold ETF demand is
expected to rise in the coming years. Jewelry
demand from India and China is expected to
rise over the next few years.
There has also been a rise in the Chinese

demand for gold. The overall consumer
demand in China rose by 24% in tonnage
terms, continuing the upward movements
that started in 2003, paused when the price
was volatile in the first half of 2006, and then
resumed. Jewelry’s performance was more
mixed: a further substantial increase in
mainland China, a smaller but solid increase
in Hong Kong, and a further fall in Taiwan.
The rise in retail investment has been
stronger.
However, the demand has also been
supported by the steady gains in gold prices,
which has appealed to the investment motive
that is present not just in the buying of bars
and coins but also often in jewelry purchase,
along with concern over rising inflation and
continued promotional activity. Stock market
performance will also play a role in
determining consumer buying power and
hence in the propensity to purchase gold.
Gold demand from other regions across the
globe is expected to rise as well, particularly
from the Middle East, Eastern Europe and
Russia (apart from Asia).
BOTTOM OF PYRAMID
OPPURTUNITIES
In efforts to sell more, the industry has
to search for newer means and avenues, and
one such untapped area is the bottom of the
pyramid (BOP), which comprises consumers at
the lower end of the market, the largest but
socially poorest economic group. India has a
huge untapped BOP market, and one company
that is providing access to the poorest section of
society is precious metal is the Muthoot
Pappachan Group.
Thomas Muthoot from the Muthoot
Pappachan Group shared his experiences and
the idea of tapping this section of the market.
The group introduced a scheme ‘Swarna
Varsham’, in which the consumer can pay an
equal daily investment which is similar to the
equated monthly installment (EMI) system. “It
is paid on a daily basis and begins at as low as
Rs16. Through this system, the consumer can
make the physical purchase of the products once
their investments have reached the price of at
least a gram of gold.” The group has increased
its customer base from 10, when it began this
scheme, to more than 500 people now.
CONCLUSION
The US subprime financial crisis had a
direct impact on the global gold market in the
quarter of 2007, as safe haven investors
spurred record inflows into gold exchange
traded funds.
Financial markets are responding to the US
dollar decline and near recession situation in
the US economy by switching their investment
away from the US dollar. Exporters of different
currencies have started billing their exporters
in currencies other than the US stocks and
bonds, and are increasing investments in
commodities including precious metals and soft
commodities as a hedge against the decline in
the US dollar. Even retail investors in the US are
reducing their US dollar-based investments.
Thus, if this trend continues, Gold along
with the basket of currencies including Chinese
renminbi may replace the US dollar over the
coming years. However, the Federal Reserve
will not sit and see the decline of the US dollar.
It will take steps to stimulate the US dollar’s
decline. Whether such steps are successful or
not is something only time can decide….
In the light of fall down of equity

markets, investors realized that they need to
have at least 10-15 per cent of their portfolio in
gold. As a result, number of retail investors is
growing. Besides, though gold has been volatile
recently, the underlying trend is for it to
rise. So, it may be recommended for investors
whose portfolios include gold, to keep holding
on to it.
Gold is a hedge against all kind of un-
certainties. Over the past 2-3 years, global
growth rates have averaged over 5.0%
consistently. Gold demand by way of ETF
increased sharply between August 2007 and
November 2007 after the US subprime crisis.
Gold is the best hedge not only against global
slowdown and readjustment but also against
geopolitical risk.
Gold, despite an occasional fall, is bound

to remain bullish due to the prevailing global
political and financial uncertainty.
BIBLIOGRAPHY
The ICFAI University Press- The Analyst
 January 2009*
 March 2009*
 May 2009*
http://en.wikipedia.org/wiki/Gold_market
<http://en.wikipedia.org/wiki/Gold_market>
finance.indiamart.com/markets/commodity/
gold.html
www.kitco.com/market
the-gold-market.com
www.bullionvault.com/gold_market.do
www.usagold.com/dailyquotes.html<http://
www.usagold.com/dailyquotes.html>
economictimes.indiatimes.com/Markets/
Bullion
www.indiabullion.com/indiagoldmarket.php
<http://www.indiabullion.com/indiagoldmark
et.php>
goldnews.bullionvault.com/gold*_india*_*ma
rket*_price*_*demand_*...*

Impact of Gold On Economy

Hochgeladen von

Dokumentinformationen

Originalbeschreibung:

Originaltitel

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Impact of Gold On Economy

Hochgeladen von

Copyright:

Verfügbare Formate

An Introduction

G old is a rare metallic element with a

1 IMPACT OF GOLD MARKET ON ECONOMY

2 IMPACT OF GOLD MARKET ON ECONOMY

 Zurich as a physical turntab

 Istanbul, Dubai, Singapore and Hong

Kong as doorways to important consuming

 Tokyo where TOCOM sets the mood of

 Mumbai under India's liberalized gold

3 IMPACT OF GOLD MARKET ON ECONOMY

4 IMPACT OF GOLD MARKET ON ECONOMY

5 IMPACT OF GOLD MARKET ON ECONOMY

India is the world's largest consumer of

In July 1997 the RBI authorized the

This reduced the disparity between

The gold hoarding tendency is well

7 IMPACT OF GOLD MARKET ON ECONOMY

In the cities gold is facing competition

Facilities for refining, assaying, making

8 IMPACT OF GOLD MARKET ON ECONOMY

10 IMPACT OF GOLD MARKET ON ECONOMY

11 IMPACT OF GOLD MARKET ON ECONOMY

The high uncertainty in the financial

13 IMPACT OF GOLD MARKET ON ECONOMY

Till a year ago, to gain from price volatility, one

Let us see how trading in futures is better than

14 IMPACT OF GOLD MARKET ON ECONOMY

In this context, if the going cost of gold is Rs

Now, let’s see what the same Rs 6 lakh can

Since a futures contract is an obligation to buy

To trade in gold futures, one has to go to a

For a high amount, however, the deposit

Let’s assume, for our case, the minimum lot size

Thus, with Rs 6 lakh, one can buy 19 lots of

Now, suppose that at the end of 3 months, the

The novelty of the futures market is that as long

17 IMPACT OF GOLD MARKET ON ECONOMY

At the same time, the downside risk is also

The above example is about a case of taking a

While all this seems pretty rosy, there are some

19 IMPACT OF GOLD MARKET ON ECONOMY

In Gold Exchange Traded Fund, the principal

20 IMPACT OF GOLD MARKET ON ECONOMY

After the closure of NFO, the Units of the

Authorized Participant means the member

Creation Unit is fixed number of Units of

After the NFO, units in less than Creation

In addition to purchase and sale of Units

The price of the Units on the exchange

Each Unit normally have a face value of

If there is in sufficient liquidity in the

Domestic price of Gold = (London Bullion

Authorized Participants and Large

24 IMPACT OF GOLD MARKET ON ECONOMY

The years of boom had trembled. The

Equities tumbled worldwide. The relative

25 IMPACT OF GOLD MARKET ON ECONOMY

Gold is a hedge against all kind of un-

26 IMPACT OF GOLD MARKET ON ECONOMY

Significantly, since gold is an asset class that

27 IMPACT OF GOLD MARKET ON ECONOMY

28 IMPACT OF GOLD MARKET ON ECONOMY