WHAT IS GOLD ?
Gold is a chemical element with the symbol Au and atomic number 79. It is a
dense, soft, malleable, and ductile metal with an attractive, bright yellow
color and luster that is maintained without tarnishing in air or water.
APPLICATIONS OF GOLD
o MONETARY EXCHANGE
o FOOD AND DRINK
o COMMERCIAL CHEMISTRY
WORLDS TOP 10 GOLD COUNTRIES
UNITED ARAB EMIRATES 58.1
The consumption of gold produced in the world is about 50% in
jewelry, 40% in investments, and 10% in industry.
India is the world's largest single consumer of gold, as Indians buy
about 25% of the world's gold, purchasing approximately 800
tonnes of gold every year, mostly for jewelry.
It is extremely dense. Meaning it is easier to carry & handle than a
sack of rice or a barrel of oil. In fact, anybody could put their entire
family's wealth in a small bag and carry away (in times of crisis,
disaster or migration).
It is quite inert and doesn't corrode. Meaning it doesn't lose value.
Thus, generations could hand over their gold to their next ones.
It is very easy to test purity anywhere in the world at almost zero
Gold is recognized all over the world. This means flexibility and
trust. No other material is this recognized across the world.
Unlike silver or platinum, gold has very little industrial use (only
about 100t annually is used in industries such as semiconductors).
Thus, you are not taking away a valuable industrial commodity for
Gold isn’t like a stock or a bond. It offers no income,
no dividend, no earnings. It is considered a store of
value, an alternative currency that’s safe beyond
reproach, but it is not cash in the bank, or even the
mattress. Gold has no untapped intrinsic value; it is
worth only what people are willing to pay for it. And
lately, many people have been only too willing.
“Gold is going up because people are buying it, and
people are buying it because it’s going up.
People do not sell Gold because it is a long term investment
But even equity is long term investment, but it gives you
returns even before you sell it.
There are even bonus shares issued by the company at some
Same thing can be argued for Property. But again property has a
potential to give you at least some sort of Rental income.
Gold does not give such returns. You will have to sell Gold to get
anything in return and this is where we Indians loose out.
The other major reason is that a lot of this Gold is in the form
of Gold Jewelry that has sentiments attached to it.
Today our economy is stuttering and
faltering and while a lot of us may blame it
on corruption, speculation, foreign
economies, external factors, Government
reforms etc.; a fact that this very habit of
ours to keep Gold in the lockers and
block it for years together has also
contributed to this.
The first major problem the Indian economy faces with this high gold
consumption rates is the increasing current account deficit (CAD).
India has to pay for its gold imports using its foreign exchange
Foreign exchange reserves hold a key especially among the
developing countries, which have to import and use the industrial
metals. Higher consumption of industrial commodities supports
industrial production. The goods produced by consuming such
commodities can be exported and the revenues can be used to fund
the current account deficit.
Even during its higher prices, the demand for gold did not go down.
The oil imports are a huge burden on India's balance of payments. But
oil consumption is something which India cannot reduce keeping its
industrial usage in perspective. High gold imports and weak rupee
have been the biggest stress points when it comes to narrowing the
current account deficit.
Misallocated capital is the second problem faced by the Indian economy
due to its gold rush. Keeping the consumption aside, physical gold (mostly
jewellery) is also considered as an investment among Indians.
However, it is an investment that does not add much value to the
productive capacity of the economy. Investments in the physical form of
gold are either stored in bank lockers or get exchanged for making
jewellery. It seldom gets traded for money.
Imagine the same amount being invested in the capital markets. It allows
the companies to raise capital in the form of debt or equity and expand
their business. It can make a huge difference to the productive capacity of
the economy. It not only just adds to the physical goods produced, it also
has a potential to improve employment in a vastly populated country like
Interest rates and Gold
It is generally accepted that interest rates are closely related to the price of
gold. As interest rates rise the general tendency is for the gold price, which
earns no interest, to fall, and as rates dip, for gold price to rise. As a
result, gold price can be closely correlated to central banks via the monetary
policy decisions made by them related to interest rates.
For example if market signals indicate the possibility of prolonged
inflation, central banks may decide to enact policies such as a hike in interest
rates that could affect the price of gold in order to quell the inflation.
An opposite reaction to this general principle can be seen after the European
Central bank raised its interest rate on April 7, 2011 for the first time since
2008.The price of gold responded with a muted response and then drove
higher to hit new highs one day later. A similar situation happened in India: In
August 2011 when the interest rate were at their highest in two years, the gold
prices peaked as well.
“indians think they are buying gold in
rupees. Actually they are buying gold in
Gold is a traditional investment strategy Indians follow. The effect of high
prices has been minimal on the volume of gold imported. The lower prices
may increase the demand in the coming days. It is the economies of the US
and Europe that play a major role in determining the price movements of
gold. By importing gold for our consumption, we Indians are investing in the
international markets and helping their economies.
By buying up billions of dollars worth of foreign gold, they are sending
Indian cash overseas, disrupting the balance money entering and leaving
the country, and thus driving down the value of the rupee. That in turn
makes key imports *more costly*, and makes it harder for business to pay
Added expense and Reduced Purity
The other fact that Gold is actually not an asset per-se is that even if
you were to keep the Gold bars and Gold coins to use it later at a
family wedding to make ornaments as Gold prices will be higher in
the future, your 10 gram of Gold today may not be translated into a
10 gram of ornament in the future
This is because there is loss of Gold due to cutting, melting, fixing
designs on it etc. Its purity too will take a beating in the process. Also
you will have to pay making charges. Agreed, still it will be cheaper
for you if you go to buy Gold at that time in future, but still it is not
an Investment as such
Income Generation myth that actually
Gold is generating money for your needs even without selling it, it is actually
creating a Liability for you in the form of Loan.
In this case Gold is an asset, but for the company giving Gold Loan as it is
generating income for them and an outflow for you.
This is the very reason there is a spurt in Gold Loan providers from banks to
private operators, all are more than happy to provide Gold Loans. They know
Indians have gold that will never be sold, and the best way to earn is to provide
loans and earn interest.
The other fact is the chances of default are less as we will do anything to get
back our family necklace or that ring your grand-ma gave you, from the lender
and repay the loan.
Why the government doesn't
want you to buy gold??
"If for one year there are no gold
imports, it will change the current
account deficit story of the
Finance Minister P. Chidambaram.
"I once again appeal to everyone to
resist the temptation to buy gold,”
Chidambaram said. “This will
show positive impact on every
aspect of the Indian economy.”
Effect of gold import on Indian economy
when the current fiscal year's first foreign trade numbers
were announced on May 13. April's trade deficit - the
excess of merchandise imports over exports - was $17.7
billion, higher by 26.4 per cent over the year-ago
period, mainly on account of an increase in gold imports .
The data knocked 430.65 points off the Bombay Stock
Exchange Sensitive Index (BSE Sensex) - the biggest intraday
fall in a year.
rising gold imports have coincided with a rise in its prices
and a weakening of the rupee against the dollar. The
combined impact has served to widen the current account
How big an impact does gold have on the CAD?
Data with the RBI shows gold was responsible for 20 per cent of the trade
deficit between fiscal years 2007 and 2009. Subsequently, in the next two
years. with inflation raging, that number rose to 30 per cent of the trade
Remove the impact of the exchange rate and international price
trends, India's annual consumption of oil and gold in volume terms does not
seem to be out of sync with the economy's performance. Gold demand
between 2000/01 and 2011/12 increased 2.3 times to 1,079 tonnes and
crude imports increased 2.3 times as well to 171.7 million tonnes. Over the
same period, the economy's size grew 4.13 times to Rs 89.74 trillion.
Other than its impact on the CAD, household investment in gold has come
at the expense of financial savings. This has hurt companies trying to raise
money to expand business. From placing about 55 per cent of their total
savings into financial instruments in 1990s, households were willing to direct
just 36 per cent of their savings there in 2011/12.
Given that the worsening CAD is the result of inherent weaknesses
in the economy, finance ministry officials tend to be unmoved by a
few weeks of falling oil or gold prices. It is the quantum of the deficit
to be financed that the ministry cares about, says an official. India
had to finance a CAD of $78 billion in 2011/12, an exponential jump
from $9.5 billion in 2006/07. India's CAD in the near future is likely
to be in the $80 billion range, the official adds, making it imperative
for the government to constantly woo foreign investors.
Rising import bill
Gold is India's second most expensive import after crude oil. While oil accounts for 35 per
cent of the import bill, gold imports contribute 11 per cent to India's trade bill. Crude is
crucial for the Indian economy, but gold is a drain on resources. Simply put, the
government has to spend precious foreign exchange for a commodity that is of little
industrial value. Terming gold imports as "wasteful expenditure", Rajiv Takru, financial
services secretary, said that India could not afford the current levels of forex spending on
Widening trade deficit
India is the world's biggest buyer of bullion. Gold imports by India surged to 162 tonnes in
May -- more than twice the monthly average in the record year of 2011. Rising imports
lead to current account deficit (exports minus imports), which is usually accompanied by
depletion in foreign-exchange assets. The Reserve Bank has described high CAD as the
biggest risk to Indian economy.
Rising deficit is bad for India as it exposes the economy to the risk of sudden stop and
reversal of capital flows. Foreign institutional investors have bought a net $15.38 billion
(Rs. 90,000 crore) worth of shares this year as of Wednesday's close, but have been selling
index futures over the last four days. In case of an event shock, for example if the U.S. Fed
withdraws its bond buying programme, there might be sudden outward flow of money,
leaving India scrambling for dollars. The slowdown in the Indian economy has made the
current situation even more volatile because the government is unable to generate heavy
Rupee under pressure:
The rupee is perilously close to its all-time low of 57.32. Having a currency at an all-time
low is not a great advertisement for the government's management of the economy
ahead of elections. If gold imports start to fall, the government will have enough dollars to
shore up the rupee.
Obstacle to development:
Indians have for centuries relied on gold for savings. As banks have made few inroads into
rural areas and consumer inflation is high, it remains the investment of choice for many.
The government worries that large amounts of savings locked up in gold curtail liquidity
and therefore investment in infrastructure and other drivers of the economy.