Sunday, February 7, 2010


Gold is a ubiquitous metal. Its uses vary from a milk man’s wedding to the crown of the queen. The preference for gold ranges from ornamental value to increasingly investment option. The prices of Gold are witnessing an unprecedented rise in the recent past. In 2009 ,the price of gold registered an increase of around 15 percent. In the last three years there has been a 70 percent increase in the price of the yellow metal . What are the reasons for this rise. This question is perplexing everyone from an economist to a common man across the world.

The problem of under supply

There are primarily three sources for supply of gold .They are gold produced from mines , recycled gold, gold released from reserves held by International Monetary Fund (IMF) , central banks etc.

There is an under supply of newly mined gold.. The supply of mined gold can never match the sudden rise in demand. The production of gold is highly contaminate in process. The production costs are rising there by discouraging exploration and production of gold. In countries like South Africa which is a major supplier of mined gold into the international market , there are infrastructural problems adversely affecting the production of gold.

Hedge against dollar

There is always a relationship between the price movement of dollar and gold. Gold is considered by investors worldwide as a natural hedge against United States’ dollar. The United states is reporting widening trade deficit . The impact of global financial crisis is severely felt on the American economy. The US economy is still struggling to come out of recession . As a result the value of dollar is subjected to severe stress. The decline of dollar is generally accompanied by rise in the price of gold . For instance , the price of dollar declined by 15 percent in the year 2009 . The price of gold increased by a similar 15 percent in the same period. Though gold is perceived to be a defacto currency , its demand is not influenced by economic meltdown . So in the hour of economic crisis , gold is perceived as a better and stable reserve compared to dollar. This is precisely why, the Reserve Bank of India recently purchased 200 tonnes of gold from IMF in a bid to diversify India’s foreign exchange reserves . Gold accounts for six percent of India’s 285 billion dollar foreign exchange reserves. Before The RBI purchased gold from IMF, it was only four percent.

All metals are on the rise

Not just the gold the other metals are also witnessing price rise. For instance the price of silver which has much more diversified industrial applications compared to gold has also increased by 40 percent in the year 2009 . The price of copper has infact doubled while the price of gold increased by only 15 percent . Therefore the present rise in the gold prices can also be a part of general rise in the metal prices too .

Global factors

Not just the economic, other global factor’s like war and social unrest, also can result in the increase in the prices of gold . Normally from consumers to countries , everyone considers gold as a safe source of savings.

The China factor

China is accumulating gold in a big way . China is even encouraging its citizens to buy gold and silver. The Chinese official television channel is telecasting programme encouraging its people to buy gold and silver. The sheer size of Chinese population contributes to price spiral once this country resorts to buying . Until now , India is the largest buyer of gold. . But, China is catching up here too.

Inflation fighter

Gold is perceived as a safe investment in an inflationary economy .The huge stimulus , bailout packages doled out by advanced capitalist governments are creating a fear of global inflation resulting in the demand for gold world over.

Investment option

In countries like India , individual house holds are also increasingly seeing gold as an investment option which has been hither to considered as an ornament only.

Speculative trends

Gold is today traded in the stock market like operations including the futures . This speculative trade in gold is making its price volatile. Even the world oil prices have a bearing on the prices of gold . Normally, gold and oil prices move in tandom.

All the above factors may not operate at a time. Several factors create pressure on the prices of this precious metal . But, the sum total effect is that gold prices are increasingly becoming highly volatile. The liquid character of gold creates a demand for it. But the speculative behaviour in the prices of gold is robbing the shine from this glittering metal at least for the individual consumers. In a country like India where gold has religious, cultural, social dimensions attached to gold , the volatility in its prices is a matter of concern .


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