Gold is a chemical element with the symbol Au and an atomic number of 79. It has been a highly sought-after precious metal for coinage, jewellery, and other arts since the beginning of recorded history. The metal occurs as nuggets or grains in rocks, in veins and in alluvial deposits. Gold is dense, soft, shiny and the most malleable and ductile pure metal known. Pure gold has a bright yellow colour and lustre traditionally considered attractive, which it maintains without oxidizing in air or water. Gold is one of the coinage metals and has served as a symbol of wealth and a store of value throughout history. Gold standards have provided a basis for monetary policies. It also has been linked to a variety of symbolisms and ideologies. A total of 161,000 tonnes of gold have been mined in human history, as of 2009. This is roughly equivalent to 5.175 billion troy ounces or, in terms of volume, about 8,333 cubic meters. Chemically, gold is a transition metal and can form trivalent and univalent cations in solutions. Compared with other metals, pure gold is chemically least reactive, but it is attacked by aqua regia (a mixture of acids), forming chloroauric acid, but not by the individual acids, and by alkaline solutions of cyanide. Gold dissolves in mercury, forming amalgam alloys, but does not react with it. Gold is insoluble in nitric acid, which dissolves silver and base metals. This property is exploited in the gold refining technique known as "inquartation and parting". Nitric acid has long been used to confirm the presence of gold in items, and this is the origin of the colloquial term "acid test", referring to a gold standard test for genuine value. Of all the precious metals, gold is the most popular as an investment. Investors generally buy gold as a hedge or safe haven against any economic, political, social or currency-based crises. These crises include investment market declines, burgeoning national debt, currency failure, inflation, war and social unrest. Speculators also buy gold early in a bull market and aim to sell it before a bear market begins, in an attempt to gain financially.
Gold has been used throughout history as a form of payment and has been a relative standard for currency equivalents specific to economic regions or countries. Many European countries implemented gold standards in the later part of the 19th century until these were dismantled in the financial crises involving World War I. After World War II, the Bretton Woods system pegged the United States dollar to gold at a rate of US$35 per troy ounce. The system existed until the 1971 Nixon Shock, when the US unilaterally suspended the direct convertibility of the United States dollar to gold. Since 1919 the most common benchmark for the price of gold has been the London gold fixing, a twice-daily telephone meeting of representatives from five bulliontrading firms of the London bullion market. Furthermore, gold is traded continuously throughout the world based on the intra-day spot price, derived from over-the-counter gold-trading markets around the world. Today, like all investments and commodities, the price of gold is ultimately driven by supply and demand. Unlike most other commodities, the hoarding and disposal plays a much bigger role in affecting the price, because most of the gold ever mined still exists and is potentially able to come on to the market for the right price. At the end of 2006, it was estimated that all the gold ever mined totalled 158,000 tonnes This can be represented by a cube with an edge length of just 20.2 meters. At the end of 2004 central banks and official organizations held 19 percent of all above-ground gold as official gold reserves. Given the huge quantity of gold stored above-ground compared to the annual production, the price of gold is mainly affected by changes in sentiment, rather than changes in annual production. According to the World Gold Council, annual mine production of gold over the last few years has been close to 2,500 tonnes. About 2,000 tonnes goes into jewellery or industrial/dental production, and around 500 tonnes goes to retail investors and exchange traded gold funds. This translates to an annual demand for gold to be 1,000 tonnes in excess over mine production which has come from central bank sales and other disposal. Central banks and the International Monetary Fund play an important role in the gold price. The Washington Agreement on Gold (WAG), which dates from September 1999, limits gold sales by its members (Europe, United States, Japan, Australia, Bank for International Settlements and the International Monetary Fund) to less than 400
tonnes a year. European central banks, such as the Bank of England and Swiss National Bank, have been key sellers of gold over this period. Although central banks do not generally announce gold purchases in advance, some, such as Russia, have expressed interest in growing their gold reserves again as of late 2005. In early 2006, China, which only holds 1.3% of its reserves in gold, announced that it was looking for ways to improve the returns on its official reserves. Some bulls hope that this signals that China might reposition more of its holdings into gold in line with other Central Banks. India has recently purchased over 200 tons of gold which has led to a surge in prices. Bank failures When dollars were fully convertible into gold, both were regarded as money. However, most people preferred to carry around paper banknotes rather than the somewhat heavier and less divisible gold coins. If people feared their bank would fail, a bank run might have been the result. This is what happened in the USA during the Great Depression of the 1930s, leading President Roosevelt to impose a national emergency and to outlaw the ownership of gold by US citizens.
Low or negative real interest rates If the return on bonds, equities and real estate is not adequately compensating for risk and inflation then the demand for gold and other alternative investments such as commodities increases. An example of this is the period of Stagflation that occurred during the 1970s and which led to an economic bubble forming in precious metals. War, invasion, looting, crisis In times of national crisis, people fear that their assets may be seized and that the currency may become worthless. They see gold as a solid asset which will always buy food or transportation. Thus in times of great uncertainty, particularly when war is feared, the demand for gold rises.
2. ECONOMIC OVERVIEW
The Indian economy has continuously recorded high growth rates and has become an attractive destination for investments, according to Ms Pratibha Patil, the Indian President. "India's growth offers many opportunities for mutually beneficial cooperation," added Ms Patil. "Today India is among the most attractive destinations globally, for investments and business and FDI had increased over the last few years," said Ms Patil. The Indian economy is expected to grow at around 7.5 per cent, according to Dr Manmohan Singh, the Indian Prime Minister. The PM acknowledged Asia's emerging economies were "growing well" and were, "in fact, contributing to the recovery of the world economy". The overall growth of gross domestic product (GDP) at factor cost at constant prices, as per Revised Estimates, was 8.5 per cent in 2010-11 representing an increase from the revised growth of 8 per cent during 2009-10, according to the monthly economic report released for the month of September 2011 by the Ministry of Finance. Overall growth in the Index of Industrial Production (IIP) was 4.1 per cent during August 2011. The eight core Infrastructure industries grew by 3.5 per cent in August 2011 and during April-August 2011-12, these sectors increased by 5.3 per cent. In addition, exports and imports in terms of US dollar increased by 44.3 per cent 41.8 per cent respectively, during August 2011. Over the next two years India could attract foreign direct investment (FDI) worth US$ 80 billion, according to a research report by Morgan Stanley. India has received US$ 48 billion FDI in the last two years. Considering the pace of FDI growth in India, KPMG officials believe that FDI in 2011-12 might cross US$ 35 billion mark.
as compared to US$ 4.3 billion. The total FDI stood at US$ 16. according to a release by the Ministry of Commerce and Industry. Exports in the referred period increased on back of demand for engineering and petroleum products.3 billion. gems and jewellery and readymade garments. India's FDI gathered momentum with the inflows growing by 310 % in June 2011 to touch US$ 5. Commerce Secretary. up 54 per cent over the same period a year ago. while the number of deals increased by 33 per cent to 195.950 crore (US$ 13. NRIs invested US$ 1.04 billion raised during 2010.74 billion received during the same period last year. Private equity (PE) investments in India stood at US$ 6. according to data compiled by Chennai-based Venture Intelligence. according to data released by the Reserve Bank of India (RBI). nearly 57 per cent higher than the US$ 10. according to a report on world investment prospects titled. 'World Investment Prospects Survey 2009-2012' by the United Nations Conference on Trade and Development (UNCTAD). according to Mr Rahul Khullar. India's merchandise exports have registered an increase of nearly 82 per cent during July 2011 from a year ago to touch US$ 29.14 billion in value terms. during January-June 2011. Exports during April-July 2011 reached US$ 108.The Economic scenario India has been ranked at the second place in global foreign direct investments (FDI) in 2010 and is expected to remain among the top five attractive destinations for international investors during 2010-12.65 billion.24 billion) by companies through external commercial borrowings (ECB) or foreign currency convertible bonds (FCCB) for infrastructure projects in the financial years 2009-2011. The increase in Forex is largely attributed due to valuation changes. Non-resident Indian (NRI) inflows in the first quarter of 2011-12 has witnessed a rise of 38 per cent as compared to the same period in 2010-11.6 billion to register US$ 318 billion during the week ended August 19.54 billion in various NRI deposit schemes during April-June 2011.
. The rise in the value of the deals so far (June 2011) recorded a growth of 52 per cent. It is the highest monthly inflow during the last 11 years. 2011. The Government has approved fund raising worth Rs 60. India's foreign exchange (Forex) reserves have increased by US$ 1.83 billion during January-June 2011.
Title of the study ―The impact of gold on the Indian economy and its evolution as an investment option‖ – A Study
3. This study will also help in establishing the relation ship between gold prices and the various economic indicators that are relevant in the current economic scenario.1.
To study the emergence of the gold standards and its decline. Need for Study
This study aims at looking into the rise of gold throughout the history and it evolution to its current status in the Indian economy.
.3. This report also throws a light on the gold standard. To study the relationship between that exists between gold prices and the various economic indicators.2. it rise in the international economy and its eventual fall.3. The study the evolution of gold as an investment option. To study the role of gold in the Indian economy. It gives an overview on the investment scenario concerning gold in its various forms. RESEARCH DESIGN
5. Boston. Governments? monetary policy autonomy was surrendered in service to the gold standard regime. Because it required automatic adjustment in response to balance of payments imbalances.4. This research will be conducted mostly with the help of secondary data. this paper focuses on the impact of the gold standard on sovereign borrowing. or to Economic and Monetary Union.1. Mosley. Massachusetts. however. At the same time. the gold standard privileged external commitments (the maintenance of par values) over nations? Internal conditions.
3. Layna. The research tries to discover and get an insight into the important and defining characteristics of gold and its relationships with the various economic parameters. 2002 Abstract What incentives did the classical gold standard provide for its maintenance? How did the benefits of the gold standard help it to be come a central piece of macroeconomic policy in the pre-World War I era? While the gold standard provided a variety of benefits to governments and societies. I argue that the classical gold standard regime served as both a constraint and an opportunity for governments. magazines company websites are the key source of information. Sheraton Boston & Hynes Convention Centre. White papers. as well as the free flow of capital and goods. "Golden Straightjacket or Golden Opportunity? Sovereign Borrowing in the 19th and Early 20th Centuries"
Paper presented at the annual meeting of the American Political Science Association. Boston Marriott Copley Place. Aug 28. in a way similar to present-day currency boards. This is data collected from literature review. commitment to the gold standard allowed governments to access international capital
. news papers.3. Literature Review
3. such as monetary restraint and the facilitation of trade flows. Further the so collected data will be processed with the help statistical tools. Research Methodology
This is partly a descriptive and partly a causal research study.5.
demand for the precious metal in domestic market has abnormally increased from 150 tonnes in 1986 to 506 tonnes in 1995 which was mainly met by imports. From the past history of gold mining and striking similarities in geological environment with the leading gold producing countries of the world. and Hutti Gold Mines Co. as well as future debt servicing capacity.. are the two primary gold producing units in India.2.markets at lower rates of interest. Modern gold mining dates from the year 1870. Gold exploration and mining scenario in India Raju k. Considering the big gap in ever increasing demand for gold and the insignificant indigenous supply from the mines. which was not thoroughly explored and mined.. Government of India liberalised the mineral policy. The repeal of the Gold Control Order and economic liberalisation have thrown open new vistas for growth of gold mining in the country. India offers a good potential for
. as evidenced by numerous ancient workings. K. Indian mine production has been insignificant and remained static between 1. This was mainly due to the fact that no new gold deposits of significant size were discovered in the country as the gold exploration and mining programmes were not aggressive due to the meagre budgetary allocations to these sectors as they were controlled by the Government. still dominates the world scene. At present. and produced together about 2. gold convertibility appeared to signal sound government finances. Ltd. Extensive and intensive ancient gold mining activity. Bharat Gold Mines Ltd. throughout the country testify the flourishing nature of the gold mining industry in India.5. Gold production in India was not significant when compared to world standards.272 tonnes. India was renowned for its gold from time immemorial. and the vast geological potential. There is ample market potential available in the country for indigenously produced gold as India is highly deficient in gold production.5 tonnes per annum during the last 10 years.6 and 2. Ltd.
3. While production has fallen to very low levels in recent years. the oldest metal known to man. Hutti.5 tonnes of gold during 1995 as against the world's total of 2. INDE Abstract Gold. The Hutti Gold Mines Co.
Cambridge. 3. The increase in returns. and other
. Feldstein Harvard University and the National Bureau of Economic Research.5. A change in the general rate of inflation should.gold. Inflation. This suggests that gold can play an important role in a diversified portfolio. its returns are generally independent of those on other assets. Adding a combination of these gold proxies to the hypothetical diversified portfolios raises their mean returns but also increases their standard deviations. And The Prices Of Land And Gold M. Gold stocks might be expected to be better investment vehicles than gold itself. USA Abstract Traditional theory implies that the relative price of consumer goods and of such real assets as land and gold should not be permanently affected by the rate of inflation. Abstract While gold is quite risky as an individual asset. 3. gold. Jaffe 1989 CFA Institute. in equilibrium. cause an equal change in the rate of inflation for each asset price. A portfolio of gold stocks on the Toronto Stock Exchange and a mutual fund of South African gold-mining stocks mirror the returns on gold. more than compensates for the increased risk. because they do not share gold's high liquidity.3. The Archaean greenstone belts and the other favourable geological horizons have to be thoroughly explored systematically by the latest state-of-art technology. however. MA 02138. Tests of four hypothetical portfolios of varying risk show that the addition of gold in each case increases average return while reducing standard deviation. The experience of the past decade has been very different from the predictions of this theory: the prices of land. consumption and convenience values.4. Tax Rules.5. Gold and Gold Stocks as Investments for Institutional Portfolios Jeffrey F.
5. pp. Government attempts to peg the price or to defend a price ceiling with sales from its stockpile must result eventually in a sudden attack by speculators. Although the risk of a future government gold auction depresses the price. an increase in the expected rate of inflation causes an immediate increase in the relative price of such ‗store of value‘ real assets. Henderson The Journal of Political Economy. The present paper presents a simple theoretical model that explains the positive relation between the rate of inflation and the relative price of such real assets. More specifically. Even risk-neutral investors require this rate of return as inducement to hold gold in the face of the asymmetric risk of a price collapse. No.5. The behavior of real asset prices discussed in this paper is thus a further example of the non-neutral response of capital markets to inflation in an economy with income taxes. Salant and Dale W.such stores of value have increased by substantially more than the general price level.. 4 (Aug.
3. 627-648 Abstract This paper is an analysis of the effects of anticipations of government sales policies on the real price of gold. 86. it also causes the price to rise in percentage terms faster than the real rate of interest and at an increasing rate. Vol. 1978). Market Anticipations of Government Policies and the Price of Gold Stephen W. in an economy with an income tax. Announcements making a government auction more probable cause a sudden drop in the price.
the rates of exchange among national currencies effectively become fixed. with a weight in gold used as the token to transport value. or lent at interest. Money backed by specie is sometimes called representative money. and avoid the reduction in circulating medium to hoarding and losses. resistance to corrosion. The exact nature of the evolution of money varies significantly across time and place. and easy divisibility made it useful both as a store of value and as a unit of account for stored value of other kinds — in Babylon a bushel of wheat was the unit of account. gold has long been used as a means of payment. GOLD STANDARD
The gold standard is a monetary system in which the standard economic unit of account is a fixed weight of gold.
. as well as by the desire of governments to control or regulate the flow of commerce within their dominion.1. though it is believed by historians that gold's high value for its utility. The gold standard can also be viewed as a monetary system in which changes in the supply and demand of gold determine the value of goods and services in relation to their supply and demand. the function of paper currency is to reduce the danger of transporting gold.4. When used as part of a hard-money system. Why gold? Because of its rarity and durability. and the notes issued are often called certificates. The early development of paper money was spurred originally by the unreliability of transportation and the dangers of long voyages. uniformity. reduce the possibility of debasement of coins. density. When several nations are using such a fixed unit of account. to differentiate them from other forms of paper money. Banking began when gold deposited in a bank could be transferred from one bank account to another by a giro system. Early monetary systems based on grain used gold to represent the stored value. DATA ANALYSIS
this gold became the basis for the gold coinage of his empire. silver was the primary circulating medium and major monetary metal. by the turn of the millennium. particularly for payment of armies. and remains an important hedge against the actions of central banks and governments. and circulated. and most prominently during the 19th century. when conquered by Alexander the Great. and the smaller solidus. After the collapse of the Western Roman Empire and the exhaustion of the gold mines in Europe.
The first metal used as a currency was silver. Gold would supplant silver as the basic unit of international trade at various times. long before this time gold had been the basis of trade contracts in Akkadia. when silver ingots were used in trade. including the Islamic golden age. Gold would remain the metal of monetary reserve accounting until the collapse of the Bretton-Woods agreement in 1972. millions of coins during the course of the Republic and the Empire. They were forced to mix more and more base metal with the gold until. the coinage in circulation was only 25% gold by weight. which was approximately 7 grams of gold alloyed with silver. however. This represented a tremendous drop in real value from the old
. before 2000 BC. Silver remained the most common monetary metal used in ordinary transactions through the 19th century.Through most of human history. as mentioned by Niccolò Machiavelli in The Prince two thousand years later. the Byzantine empire continued to mint successor coins to the solidus called the nomisma or bezant. the peak of the Italian trading states during the Renaissance. and it was not until 1500 years later that the first coinage of pure gold was introduced. and as a store of value. The paying of mercenaries and armies in gold solidified its importance: gold became synonymous with paying for military operations. However. Gold was the metal which was used as an ultimate store of value and as means of payment when portability was at a premium. and later in Egypt. of which 4.2 was gold. The Roman mints were fantastically active — the Romans minted. The Roman Empire minted two important gold coins: aureus. a means of maintaining general liquidity. The Persian Empire collected taxes in gold and. which weighed 4.4 grams.
Spain had access to stocks of new gold for coinage in addition to silver. established standard references to Allah on the coins. In 1284. the florin. but it is with Caliph Abd al-Malik (685–705) who reformed the currency that the history of the dinar is usually thought to begin. the ducat.4680 grams of 22 carat gold. Thus. The wide availability of milled and cob gold coins made it possible for the West Indies to make gold the only legal tender in 1704. The growth of Islamic power and trade made the dinar the dominant coin from the Western coast of Africa to northern India until the late 1200s. He removed depictions from coins. grosh. which was to become the standard of European coinage for the next 600 years. and the basic coin the 8 escudos piece.95% pure Roman coins. and that uncertainty over the future purchasing power of money depresses business confidence and leads to reduced trade and capital investment. The Caliphates in the Islamic world adopted these coins. The circulation of Spanish coins would create the unit of account for the United States. originally minted by the Persians. or "doubloon".
The essential features of the gold standard in theory rest on the idea that inflation is caused by an increase in the quantity of money. because of Venice's preeminent role in trade with the Islamic world and its ability to secure fresh stocks of gold. Beginning with the conquest of the Aztec Empire and Inca Empire. an idea advocated by David Hume. noble. respectively. and Philadelphia's currency market would trade in Spanish colonial coins. using current measures. which was originally set at 27. would remain the standard against which other coins were measured. the "dollar" based on the Spanish silver real. and was valued at 16 times the equivalent weight of silver. The ducat. The central thesis of the
. Other coins. produced from African gold: the dinar. The dinar and dirham were gold and silver coins. and it continued to be one of the predominant coins for hundreds of years afterwards. were also introduced at this time by other European states to facilitate growing trade. and fixed ratios of silver to gold. and guinea. zloty. trade was increasingly conducted via the coinage in use in the Arabic world. the Republic of Venice coined their first solid gold coin. The primary Spanish gold unit of account was the escudo.
such as some modern advocates of supply-side economics contest that so long as gold is the accepted unit of account then it is a true gold standard. and the markets from which its consumers may purchase goods. friction between kinds of currency. Under such a system.gold standard is that removing uncertainty. In an internal gold-standard system. advocates of the gold standard often believe that governments are almost entirely destructive of economic activity. then this is known as a 100% reserve gold standard. these were called "SDRs" for Special Drawing Rights. the solidity of its credit. will increase personal liberty and economic vitality. Some believe there is no other form of gold standard.
. and that a gold standard. by expanding both the market for its own goods. Under the Bretton Woods system. and possible limitations in future trading partners will dramatically benefit an economy. since on any "partial" gold standard the value of circulating representative paper in a free economy will always reflect the faith that the market has in that note being redeemable for gold. In an international gold-standard system. large inflows or outflows occur until the rates return to the official level. gold or a currency that is convertible into gold at a fixed price is used as a means of making international payments. the benefits of enforcing monetary and fiscal discipline on the government are central to the benefits obtained. Others. which may exist in the absence of any internal gold standard. In much of gold standard theory.
Differing definitions of "gold standard"
If the monetary authority holds sufficient gold to convert all circulating money. by reducing their ability to intervene in markets. when exchange rates rise above or fall below the fixed mint rate by more than the cost of shipping gold from one country to another. gold coins circulate as legal tender or paper money is freely convertible into gold at a fixed price. International gold standards often limit which entities have the right to redeem currency for gold. or a full gold standard.
Austria 378 tonnes and Italy 356 tonnes. Central banks started building up their stocks of gold from the 1880s. the then dominant economic. at 310 tonnes. Argentina 440 tonnes. The world's total of official gold reserves is estimated to have been about 8. Some other countries had by then accumulated much larger stocks: the United States had 2. Even Australia had more than the UK. Russia 1. during the period of the classical gold standard. As other countries decided to join the gold standard. compared with only 700 tonnes in 1870.
.233 tonnes. and paper money was convertible into gold at a fixed price.293 tonnes. commanded such universal confidence that it actually needed very little gold. its reserves were 161 tonnes and by 1913 this had risen to a still moderate figure of 248 tonnes. But the central banks have affirmed that gold will remain an important reserve asset for the foreseeable future and it retains an important role in reserve management.030 tonnes. France 1. GOLD AS A RESERVE ASSET
Central banks. as the central bank at the centre of the system. they also started to accumulate gold so as to be able to maintain convertibility at a fixed price. and official international institutions. The Bank of England. the amount of money in circulation was linked to the country's gold stock. That at least was the case during the height of the gold standard for the UK.4. for countries on the gold standard. The development of banking and credit meant that the amount of money in circulation was greater than the gold stock itself. The process of rebalancing reserve portfolios to adjust to changing conditions has led to a reduction in the amount of gold held by some central banks recently and this process may continue for some years to come. Germany 439 tonnes. In 1870. have been major holders of gold for more than 100 years and are expected to retain large stocks in future. They currently account for about 20% of above-ground stocks. Under that system.2. political and financial power. but everybody had sufficient confidence in convertibility that there was no danger of this option actually being exercised.100 tonnes in 1913.
most gold had always been held privately. the United States under President Roosevelt devalued the dollar in terms of gold. Gold. through the fixed official dollar price of gold. acceptable to counterparties. Central banks kept gold because. gold was still the primary "reserve asset". and after several years of moderate but persistent inflation. US official holdings rose from 6. it abandoned the system. But gradually. devaluing or abandoning the system. circulating as currency among citizens and across borders in commercial trade transactions. At their peak in the 1960s.up to that point.000 tonnes at the end of World War II. it was still the foundation of the international monetary system. came to be used as a weapon in economic competition and national rivalries. which had been the foundation of the first genuinely international monetary system during the period before World War 1. Although there was no direct link between gold holdings and national money supplies (as there had been under the classic gold standard). the fixed official gold price again became unrealistic. was faced with the choice of deflating. official gold stocks reached about 38.The rise in official gold stocks
The period of economic nationalism between the two world wars saw a rapid concentration of gold in official hands .
. In August 1971. when it had about 60%of all the official stocks of gold. Gold can indeed play a crucial and strategic role in central bank reserve mobilisation in case of need. when used either as cash or as collateral.or perhaps slightly more . and the United States. as central banks created more money than was consistent with stable prices. with President Nixon "closing the gold window".of all above ground stocks.000 tonnes in 1925 to 18. and dollar convertibility.000 tonnes and probably accounted for about 50% . So gold provided the "anchor" to which all currencies of member countries were linked. as the pivot of the system.
As the ultimate form of payment. raising the price from $20. Central banks could convert dollar balances into gold at the official price. gold has sometimes proved the only asset.67 an ounce to $35 an ounce. In 1933-34. directly or indirectly. This new higher price caused holders of gold around the world to sell their holdings to the United States.
" The US government simultaneously took ownership of an equivalent quantity of Iranian gold that had been frozen at the New York Fed.and in the light of this recent experience . transferred 50 tonnes of gold instead. dollars in return for releasing the American hostages it held. South Korea and Thailand among them. The gold collected was either placed directly in reserves. Iran refused to accept U. As then Treasury Assistant Secretary Manuel Johnson went on to say in Congressional testimony in 1983 . so there was no net cost to US reserves.S. In the aftermath of the 1997 Asian currency crisis several countries in the region announced plans to mobilise residents' gold holdings . gold in the private sector can provide a vital support for public sector purposes. or sold for dollars which could be used to repay external debt or in intervention to support their ailing currencies. An IMF official at the time noted: "There were discussions over the weekend about a pool of central banks coming to the rescue and the first question that was asked by those sponsor banks was whether they were prepared to give their gold as collateral. in the 1981 Iranian hostage crisis. So the U.S.
In 1974 Italy secured a $2 billion loan from the Bundesbank with gold as part of a package (including the then largest ever IMF loan) to shore up its balance of payments after the 1973 oil price rise.Malaysia."
Finally. of course. later. Only South Korea raised significant amounts (approximately 270 tonnes) but the avowed intent of all three was to rely on local citizens' patriotism to surrender gold in return for government bonds or local currency."The Treasury.
Hit by a short-run foreign exchange crisis in 1991. thereby adding to credibility. India had to rely on its bullion holdings to survive. First the government swapped 20 tonnes on the Swiss market and. regards the US gold stock as part of our national patrimony and of value as a precautionary asset.Some examples of where gold has been used in political or economic emergencies are as follows:
For example. shipped a further 46 tonnes to London as collateral for a loan from the Bank of Japan.
Tracking central bank gold holdings
Most central banks place data on their reserve assets. The price of gold therefore behaves in a completely different way from the prices of currencies or the exchange rates between currencies.but so too do the exchange and interest rates of currencies held in reserves. including gold. it rarely makes sense to have all your eggs in one basket. Official holdings are therefore generally more transparent and easier to track than those of other large holders such as most major private investors. Gold has good diversification properties in a currency portfolio. Obviously the price of gold can fluctuate .
Why central banks hold gold
Monetary authorities have long held gold in their reserves. whereas currencies and government securities depend on government promises and the variations in central banks‘ monetary policies. some central banks also hold stocks of gold that are not considered or reported as formal reserves while some official or quasi-official institutions have gold holdings that are not reported. in the public domain and report them regularly to the IMF. It is sometimes suggested that maintaining such holdings is inefficient in comparison to foreign exchange.000 tonnes . These stem from the fact that its value is determined by supply and demand in the world gold markets. there are good reasons for countries continuing to hold gold as part of their reserves.
. However. including reports made under the Standard Data Dissemination Standards. The World Gold Council compiles a number of statistical tables based on official data in the public domain and drawn from a variety of sources. Today their stocks amount to some 30.similar to their holdings 60 years ago. These are recognised by central banks themselves although different central banks would emphasise different factors. However. In addition holdings may not always be reported in a way that facilitates analysis. A strategy of reserve diversification will normally provide a less volatile return than one based on a single asset.
In any asset portfolio.
gold is much less vulnerable.
If there is one thing of which we can be certain. In emergencies countries may need liquid resources. In contrast. Reserves held in the form of foreign securities are vulnerable to such measures. Where appropriately located. It can also serve as collateral for borrowing. it is that today‘s status quo will not last for ever.
Countries have in the past imposed exchange controls or. Nor is there any risk of the liability being repudiated. an unexpected surge in inflation. Gold provides this. highly damaging event. Reserves are for using when you need to. at the worst. while global shocks can affect the whole international monetary system. Gold has maintained its value in terms of real purchasing power in the long run and is thus particularly suited to form part of central banks' reserves. a generalised crisis leading to repudiation of foreign debts by major sovereign borrowers. paper currencies always lose value in the long run and often in the short term as well. total asset freezes. Owning gold is thus an option against an unknown future. a regression to a world of currency or trading blocs or the international isolation of a country. Its status cannot therefore be undermined by inflation in a reserve currency country.Economic Security
Gold is a unique asset in that it is no one else's liability. It provides a form of insurance against some improbable but. Gold is liquid and is universally acceptable as a means of payment. Such events might include war. if it occurs.
. Economic developments both at home and in the rest of the world can upset countries‘ plans. Total and incontrovertible liquidity is therefore essential.
It is the price deliberately paid to provide protection against a highly improbable but highly damaging event. an unexpected surge of inflation. in a world of low interest rates. The IMF's Executive Board. this is less than is often thought. There may be an "opportunity cost" of holding gold but.an indestructible asset and one not prone to the inflationary worries overhanging paper money. The same applies to gold held on the balance sheet of a central bank. There is a gold lending market and gold can also be traded to generate profits. The other advantages of gold may well offset any such costs. Such an event might be war.
. This is untrue. has recognised that the Fund's own holdings of gold give a "fundamental strength" to its balance sheet. or the international isolation of a country. representing the world's governments. Some countries give explicit recognition to its support for the domestic currency.
The opportunity cost of holding gold may be viewed as comparable to an insurance premium. a regression to a world of currency and trading blocs.
Gold is sometimes described as a non income-earning asset.Confidence
The public takes confidence from knowing that its Government holds gold . a generalised debt crisis involving the repudiation of foreign debts by major sovereign borrowers. And rating agencies will take comfort from the presence of gold in a country's reserves.
THE RESERVE BANK OF INDIA
The Reserve Bank is required to hold a fixed amount of gold under the Reserve Bank of India Act. The move vastly improved India‘s reported import coverage ratio.72 billion.1150 million equates o just $24. as the value of existing gold reserves were revised up at the time). is still he fifteenth highest of central banks in tonnage terms in the world. The evolution of the gold related policy since independence was centred around some major objectives. The RBI currently olds 357. gold bullion and foreign securities. The system was later amended. The RBI bought back all 67 tonnes of gold later that year. which though small in comparison to total reserves (4. that required the bank to hold at least Rs. The funds were used to help India meet its short-term debt obligations and import bill.4. The original RBI Act (1934) obliged the Reserve Bank to hold 40% of its assets in gold coin..3. India shipped a total of 47 tonnes of the country‘s gold reserves (the RBI is allowed to hold up to15% of its total old reserves outside the country) to the Bank of England as collateral against a $400 million loan and leased a further 20 tonnes of confiscated gold (not included in the reserve figures)to Union Bank of Switzerland with a six month buyback option to raise a $200million loan. India mobilised its gold reserves during the 1991 balance of payments crisis. with not less than Rs.6 billion.1150 million of its assets in gold (this did not imply the need to acquire additional gold. Rs.
RBI and Its Gold Policy Measures
The Reserve Bank of India (RBI) holds 357.28 billion to Rs. to the minimum reserve system. viz. reducing the domestic demand and prices and curbing smuggling. regulating the supply of gold. under the Reserve Bank of India Amendment Act 1956. Between May and July.75 tons of gold forming about 6 per cent of the current value of its total foreign exchange reserves.7 million at today‘s exchange rate and is tiny in comparison to India‘s total foreign exchange reserves of 151. 400 million in value held in gold.7 tonnes of gold. It also revalued its gold reserves from Rs. weaning away people from gold. as it moved from using an outdated gold price4 to valuing its reserves at close to he international market price.4% as at September2006).
mine production and the scrap market. The Government decided to sell confiscated gold in small quantities through the RBI. Official imports to discourage smuggling was first mooted in 1977 but viewed against the forex reserves available then. making it compulsory for gold smiths to be licensed and submit accounts of all gold received and utilized by them etc. The measures met with lot of resistance and criticism. including how the jewellery sector is being affected by the current social and economic changes. one that has expanded considerably during its period of liberalisation. Accordingly. It looks at all the major aspects of demand and supply. who symbolises fertility.
4. it did not have any major impact on smuggling. the most widespread faith being Hinduism. This coupled with complexities resulted in the failure of the Gold Control order. the Gold Control Order 1962 was issued.In the wake of the Chinese war. ROLE OF GOLD IN INDIAN ECONOMY
India is the world‘s largest gold market in volume terms. banning the making and selling of jewellery above 14 carats.. which is practiced by around 80% of the population. the role of the Reserve Bank of India and on the supply-side. it was thought as an impossible proposition.4. Gold is seen as a symbol of wealth and prosperity in the Hindu religion. However. Bullion imports and exports were also banned but restrictions on import of gold into the country resulted in the flourishing of smuggling and unofficial transactions in foreign exchange. it was felt in some circles that it would be feasible to make a frontal attack on demand for gold in India.
The origins of gold demand
Indian gold demand is firmly embedded in cultural and religious traditions. The goddess Lakshmi. The country has one of the most deeply religious societies in the world. new ways to invest in gold. is said
. This part of the report provides a broad overview of the gold market within the context of India‘s new super charged economy. productiveness and prosperity.
where brides are often adorned from head to toe in gold jewellery. the idea has been promoted across the North and West of the country. dressed in gold-embroidered red clothes. which they like to buy or gift during religious festivals. The gold (and other gifts) the bride receives or her ―Streedhan‖ (―Stree‖ meaning woman and ―dhan‖ meaning wealth) mean her parents can make sure she is financially secure and enjoys at least the same standard of living to which she was accustomed in her childhood. Akshaya Thrithiya has become a major gold-buying occasion in the South of India. wedding-related demand is big business. Gold is especially important in this respect as it remains directly under her control. where sales have reached record levels. Most of this will be a gift from her parents as a way of giving her some inheritance. This is because the Rupee is not yet fully convertible – Indians are only allowed to hold financial assets in Rupees – whereas they have been allowed to hold gold since 1990 when the Gold Control Act was repealed.to have been bathed by elephants who carried pure water in golden vessels. with gold coins flowing from her hands. Akshaya Thrithiya. and April and May. Gold is also viewed as a secure and easily accessible savings vehicle by the rural community. Not all gold demand is allied with cultural and religious beliefs. which marks the beginning of the Hindu New Year and usually takes place in October or November. though a good many purchases will be made well in advance of the wedding. Purchases on this day are considered auspicious (it is the third most auspicious day in the Hindu calendar). Indeed. which has also resulted in a significant rise in gold sales in these regions. Since 2005. has also become an important day to buy gold. She is depicted as a beautiful woman of golden complexion. The most important of these is Diwali. Much of this demand takes place in the wedding season. Gold has the added virtue of being an inflation hedge. falling in April or May. Over the past five years. Since it is suggested that those who worship her gain wealth. as Hindu tradition dictates that the family‘s assets are only passed down to sons. which falls between October and January. The association between gold and ―auspiciousness‖ has been used in recent years to promote the idea of buying gold.
. it is customary for the parents of a baby girl to start accumulating gold for this purpose soon after the child is born. especially in the State of Tamil Nadu. Gold also plays an important role in the marriage ceremony. where around 70% of the population lives. Hindus consider gold an auspicious metal. With an estimated 10 million marriages a year taking place in India.. whereas she may not be privy to the family‘s other financial affairs.
. when sales accelerated strongly. and 20022005. The higher variability of volume as oppose to value spending is a function of both the retail price setting mechanism in Indian.224-316 billion a year. thanks to the progressive liberalisation of its economy and the consequent inflow of foreign direct investment. The country‘s $200 billion retail industry is changing.more than four times the 22 million square feet estimated in 2005.284 billion per annum and fluctuated in a relatively narrow range of Rs. which has allowed the economy to start reaping the benefits of globalisation on a truly massive scale. India is now the fifth largest economy in the world (on a PPP basis) having posted average annual growth rate of 6%p. Shopping centres are starting to spring up across urban India. KPMG and the Federation of Indian Chambers of Commerce and Industry estimate that the amount of shopping centre space will have risen to90 million square feet by the end of 2007. held back by relatively weak income growth. The economy shows no signs of slowing either. Gold sales were broadly stable in the three years that followed. as well as the origins of demand. when sales were broadly stable in value terms. A noticeable feature of India‘s development has been the strength of its domestic economy relative to most emerging markets in Asia. spending averaged Rs.a for the past decade. During the first period. which has accounted for the lion‘s share of growth over the past decade. averaging 709 tonnes and fluctuating between 506-810 tonnes. with the mergence of new large-scale retailing.Recent Economic Trends
The Indian economy has enjoyed rapid growth over the past decade. This is particularly true of consumer spending. Sales in tonnage were more volatile over the period. something which is changing theface of retailing and will affect traditional gold retailers. Spending was especially strong in 1998 thanks to the release of pent up demand following the removal of import controls in November 1997.
Gold Demand Trends and Outlook
The past decade can be split into two distinct periods as far as the value of gold sales is concerned: 1996-2001.
That Indian demand is not necessarily adversely impacted by rising prices is clear from the experience of the past few years (2002-2005).15. when gold demand rose steadily from Rs. More workers are moving from low income to middle and high income quartiles.276 billion to Rs. A prime example would be the parents of a baby girl saving for a future Streedhan. with each item weighed then priced according to the prevailing daily market rate. 276billion in 2002 to Rs. with spending increasing from Rs.The price of jewellery changes in line with changes in the international market price in India. 473 billion in 2005. which is supporting discretionary spending on consumer goods.
. The retail mark up is also normally relatively small in relation to the value of the piece. Last year. Indians are enjoying a rapid acceleration in income growth. especially where gold is being used as a long-term savings vehicle. Still. who will usually purchase acertain monetary value of gold each month. This shows the relationship between the average annual 22-day rolling annualised volatility rate of the rupee denominated gold price and the change in the value of gold sales: the two show a clear inverse relationship over the sample period from 1993 to 2005. including gold. The same message would seem to come from H1 2006‘s experience.473 billion (or 571 tonnes to 750 tonnes)despite a coincident rise in the gold price from Rs. What does seem to adversely impact on demand is a pick up in the pace of daily price fluctuations or volatility.599. Consumers are wary about purchasing when the price is volatile for fear that they buy and then find the price falls. a rising price can often stimulate investment demand for gold. especially into the outsourcing and IT sectors. as was the case in Q1 2006.
The main theme of the past few years has been a solid upswing in gold sales. Indeed.026 to Rs. when the value of spending fell by 7%. although the volume of gold they can afford each year will rise and fall with the price.This has been underpinned by social and economic changes in the Indian economy– trends that look set to persist – alongside new and better marketing campaigns from 2004 and a growing perception that higher gold prices are here to stay. when retail investment spending surged by 32% year-on-year despite an 11% rise in the gold price in rupee terms.19. as India continues to attract large volumes of foreign direct investment. as gold price volatility spiked upwards. the value of gold sales is often quite price inelastic.
especially with the relevant marketing initiatives targeted at India‘s new affluent young middle class. Global Insight. young middle class Indians are more willing to spend than their parents‘ generation was.estimated 110million households were earning between $10-30K. However. These socio-economic changes have led to enormous growth in the potential market for gold jewellery. 16 million between$30-80K and just short of a 1 million earning over $80K. 87% and 200% in real terms to 167 million. while tastes are becoming more international. gold must compete with a growing desire for other luxury goods too. it seems likely that the net impact of these socio. Equally importantly. an economic forecasting agency. with the rise in gold sales outstripping the rise in general retail spending indices. 30 million and 3 million respectively by 2015. More women are seeking their independence by entering the workforce. Recent experience supports this premise. combined with a significant increase in their personal wealth. $30-80K and $80K+to increase by 52%. This has increased the number of women falling into gold‘s core target group in India from 25 million in 2002 to 32 million in 2005 and contributing to the rise in gold purchases over the past few years. including India. has meant that gold has become a more relevant and desirable product to a greater number of women. expects the number of people earning between $1330K. found that the increasing independence of woman in developing countries and shifts in attitudes and behaviours.
. such as mobile phones and home computers. which means there are increasingly two bread winners in the family and there is more disposable income available for discretionary purchases than in the past. with households increasingly demanding all the conveniences of the modern world. Of course.economic changes will be positive for gold sales. conducted across six key gold markets. as there is a much bigger pool of money available.Social trends are also changing.
A recent WGC study.
Since October 003 the government has allowed futures trading and there are now three futures exchanges. In 2005. the weighted return on these alternative assets can be considered as another influencing factors. technological change in agriculture (through mechanization and high yielding varieties). The next major development is likely to be the arrival of Exchange Traded Funds(ETFs).
. Mutual funds. the two largest being he Multi Commodity Exchange of India Ltd(MCX) and the National Commodity and Derivatives Exchange Ltd NCDEX). have generated large marketable surplus and a highly skewed rural income distribution is another factors contributing to additional demand for gold. and to buy and sell that interest through the trading of a security on regulated stock exchange.
Inflation redistributes incomes in favour of non-wage income earners. the demand for gold as a store of value can be expected to rise. small savings. With incremental income of non-wage earners. Hence income generated in these service sectors can be treated as a determining variable
Since bank deposits. Indians bought 102 tonnes of gold coins and bars.Factors Influencing Demand for Gold
Following are the factors influencing the demand for gold. But there are new ways toinvest in gold. etc are alternative avenues for investing savings. These instruments give investors a relatively cost efficient and secure way to access the gold market. expected before he end of 2006. leading to more skewed income distribution.
Black money originating in the services sector. like real estate and public sector. The increase in the irrigation.
Ways to buy gold
Traditionally most investment has taken the form of physical gold. They are listed securities that are backed by allocated gold held in a vault on behalf of investors and are intended to offer investors a means of participating in the gold bullion market without the necessity of taking physical delivery of gold. has contributed to gold as store of value.UTI Asset Management Company Ltd and Benchmark Asset Management Ltd are currently seeking regulatory approval to sell a gold ETF.
5% has it helped the gold trade to move back to Mumbai and it would not be a surprise to see Mumbai to re-emerge as one of the largest gold trading centres in India and maybe the world. a slump from Rs 12. Delhi prices command some prominence in some parts of the country. The physical delivery in bullion for the both NCDEX and MCX also generally takes place in Ahmedabad.
. Mumbai and Ahmedabad together account for about 45% Indian gold trade.The Gujarat bullion market. after the VAT implication in Rajasthan and Gujarat there should not be major difference in the tax structure. had hit a trough in the 2001 fiscal with volumes crashing by over 50 per cent to less than 140 tonnes.
Delhi is another major gold market in the country. Still Ahmedabad is considered one of the important bullion markets in the country. price quoting in Mumbai market is taken as reference price in most other parts of the country. However.000 crore worth of transaction in the previous year. the Ahmedabad bullion juggernaut has slowed down perceptibly to Rs6000 crore worth of business in the last fiscal. which at 280 tonnes accounted for a high 40 per cent of the entire country's 700-tonne market in 2000-01. Delhi Gold market constitutes about 15% of total Indian gold trade.
The bullion market of Ahmedabad. In rupee terms.Major Markets in India Mumbai
Mumbai is the major wholesale trading centre in India. Mumbai was losing its shine due to high sales tax of 2% prior to April 2002. became the largest landed destination in the country for the yellow metal after the Gold Control Act was scrapped in 1991-92. Delhi was gaining prominence when Mumbai was loosing its shine. but the rationalization of the local taxes in Maharashtra in April 2002 which brought sales tax level to 0.
In the Indian context. India‘s demand will continue to be satisfied almost entirely from imports.
Economic Implications of Gold Imports
Gold by it self does not add much to production or productive capacity. Mean while. should. continue to boost discretionary spending on gold.32 in 2003. is attributed to expectations of still higher prices6.5 billion. in tandem with new successful marketing campaigns. in the face of high prices and generally good economic conditions. The harp increase inscrap5 in 2002 and 2003 (Figure 10) was driven by a combination of distress selling in rural areas because of the poor2002 monsoon and subsequent hit to agricultural incomes.
. thanks to the influx of foreign capital. as aside from the scrap market. the decline in scrap supply in 2005. Scrap supply is sensitive to general economic conditions.compared with $271-$279 in the previous three ears).Above ground stocks
Supply from above ground stocks is much more important in India. as well as a higher high gold price the gold price averaged$309. India‘s imports at the prices prevailing in the world market at that time. very little supply comes from domestic sources. Its dynamic population growth and strong cultural and religious affinity to gold will continue to underpin structural demand.68 in 2002 and $363. notwithstanding temporary fluctuations associated with spikes in price volatility. with the main source of domestic supply coming from recycled jewellery.2 billion. However the foreign exchange used for importing it in effect reduces the availability of this resource for other imports (including raw materials. India looks poised to remain the world‘s foremost gold consumer in tonnage terms for many years to come. the price of gold and price expectations.In summary. Price expectations also matter. (Equivalent to about one fifth of exports and one sixth of imports). Indians have recycled an average of 105 tonnes of gold per annum. intermediates and capital equipment) needed for current production and to expand productive capacity. would have cost $ 2. the magnitude of FOREX expended on gold imports has been large and growing in 1970. Over the past five years. For instance. rapid income growth. equivalent to about one eighth of merchandise exports and 8 percent of merchandise imports and the corresponding figures for 1997 was $ 7.
are no different from FOREX holdings. Their continued rapid growth can have significant consequences in the terms of scale and functioning of the hawala market. earning of migrant workers remitted through hawala channels and smuggling of silver and contra brand drugs. not all gold is held in the form of ornaments. over invoicing of imports. the fact that there is a very well developed world market for metal and that its prices have until recently increased much faster than the general price level makes it a attractive asset. Though it does not earn any interest and though it is no longer used as the standard for fixing currency values. Clearly they. The nature and sources of the latter are not indicated for lack of information. gold‘s holding whether in the form of bars or ornaments. The magnitudes involved are large in relation to the size of the country‘s foreign trade and payments: The gold stock of the country at the end of 2000 was close to 14. the availability of FOREX for other purposes and the health of the balance of payment. After 1992. That the bulk of it is in the hands of private individuals who may or may not be willing to convert it into other
. In any case. So far Gold is treated as ornament. It represents command over both at home and at abroad which can in principle be invoked whenever necessary. But this function does not in any way dilute its advantage as liquid. Possibly their relative importance has changed in effect the hawala market continues to operate but with indirect legal sanction given by the gold import policy. a large part of it is held in the form of bars. the value of legal gold imports cleared through the customs are included as part of merchandise imports in the balance of payments data (but not in the trade statistics) an equivalent amount being recorded as transfer receipts under invisible. Its physical depreciation is negligible and it can be readily converted in to cash by sale in the world market by acquiring other resources both at domestic and international market. gold imports being illegal were financed by the proceeds of under invoicing of the exports. must have been derived from one or the other of the extra legal sources cited earlier. it can be treated as durable consumer good. These transactions did not figure at all in the country‘s trade or payment statistics.Prior to 1992. risk free asset.000 tons valued at current price at $ 165 billion. as well as the resources needed for the still substantial smuggled gold. Altogether from country‘s point of view. The other characteristics of gold are that it is a highly liquid store of value.
these holdings are purely a store of value. More interestingly the location of the bulk of these holdings is believed to have shifted. Unlike jewellery. although in the Middle East coins and small bars are often incorporated into jewellery. private and public-sector holdings. a substitute for investment in other assets. Of course. the value of additions to gold stock accounts for over 20% of private noncorporate sector‘s investment in financial instruments. If accumulating gold. a substantial portion of
. this led to increased gold smuggling.
4. and does not detract from this feature. India lost an estimated Rs6000 crores (Rs 60 billion) of foreign exchange.000 crore per annum since 1997. Exclusion of gold from the estimates of domestic savings thus understates the household and overall domestic savings rate.220 per ten grams upto January 1999.5. gold is the most popular as an investment. Private investment holdings amount to just under 25. Private sector holdings come in the form of bars and coins. Whereas thirty years ago. and this bias has been increasing from the last two decades. Smuggling gradually came down when the duty was reduced to Rs250 per ten grams on April 2001 and subsequently to Rs100 per ten grams. The more so because investment in gold.after which it was increased to Rs400 per ten grams.2.
The import duty on Gold was Rs. in real sense. Investment demand can be split broadly into two. GOLD AS AN INVESTMENT INSTRUMENT
Of all the precious metals. is no different from accumulation of FOREX reserves or investment in foreign financial assets. it is important to such a context.1000 to Rs. It is significant that during the last five years. to understand why people prefer to hold gold and the conditions under which they will add or reduce the stock of it in their hands. a figure that has been growing slowly over time. then they must be properly counted as part of the economy‘s savings. As a result. in principle. The amount of duty released from gold imports indicates an annual figure varying from Rs.000 tonnes. which is held at least in part for decorative purposes.assets is another matter.
Belgium. and which may hold or increase its value if for some reason investors flee from purely financial assets like bonds and equities. These differences can partly be explained by the way in which reserves are viewed nationally. Gold holdings twenty years ago are a good predictor of a central bank‘s holding today. Germany. say. will normally be able to achieve an increase in return of perhaps 1% by lending out his gold over the return he would gain by holding physical gold. In markets with poorly developed financial systems. The investor could hold gold-linked paper assets or could lend out the physical gold on the market. or where trust in the government is low. Current holdings by different countries are quite diverse both in terms of absolute quantity and as a proportion of their total external reserves. most notably by Argentina.this was held by Western investors. Switzerland and the UK. Australia. the overwhelming majority is now thought to be held in other parts of the world. inaccessible or insecure banks. the possibility of changes in policy has had a substantial impact on the gold price. Reasons for holding physical gold vary widely. particularly if his position is more than. In addition he will save on the storage costs. the prime attraction of gold is as an investment which has very low or negative. If gold is held primarily as an investment asset. the largest being Taiwan and Poland. 10.
. While proper discussion of the gold lending market is reserved to the second chapter of the report. and also by the very large size of reserves relative to the underlying flow of production and consumption.000 ounces. In countries with a stable political and financial system. Canada. correlation with other assets. anonymous and readily marketable anywhere. it does not need to be held in physical form. suffice to observe here that an investor who wants exposure to gold. The stability has been particularly marked among the larger holders . There have also been confirmed buyers. and the way in which decisions on reserve policy are taken. the International Monetary Fund and France. There have been substantial sales. gold is attractive as a store of value which is portable. the Netherlands.including the United States. Given the size of official reserves relative to consumption levels.
Investment vehicles Retail Gold Investment
The definition excludes so-called ―investment jewellery‖. like Argentina.15072 Troy ounces). however. one is dealing with a dynamic situation. however. This would include so-called ―investment jewellery‖ (generally high carat. low mark-up jewellery purchased with an investment motive). 10g. to complicate matters still further. 10oz. Austria. The problem with such a definition is that it is highly subjective as well as excessively elastic. there could be a problem with unallocated as opposed to allocated gold holdings. such as the Tael. the definition of retail investment demand excludes all institutional investment. Finally. makes it impossible on a systematic and regular basis to measure ―investment jewellery‖ demand worldwide. In counting such bullion. wedding-related demand for high-carat jewellery in India has an important investment motive but it is also purchased for adornment. with these in turn defined by the standard adopted by the European Union. It is decided to only count physical bullion coins and bars. For example. changing tastes in jewellery and the shift to lower-carat articles in some parts of the world.
The most traditional way of investing in gold is by buying bullion gold bars. private investor metal account holdings are included. as the part of the former would be lent out. Making an allowance for this is. these can easily be bought or sold "over the counter" of the major banks. In some countries.. Bars are available in various sizes. Theoretically in the latter case. where highcarat was formerly predominant. or 1
. for example in Europe these would typically be in 12.5kg or 1kg bars (1kg = 32. For example. In addition. 1oz bar. impractical.
The broadest definition of retail investment would incorporate any private sector demand for gold that was not related purely to adornment or industrial purposes. there are bullion dealers that provide the same service. It is subjective because purchase-motive is extremely difficult to measure on a scientific basis. Alternatively. although many other weights exist. Liechtenstein and Switzerland.
by the Department of Treasury.9999 fine (99. due to the fact that they are much easier to store.). RCM bars do not come with either protective cases or certificates. the large Swiss and Liechtenstein banks buy and sell these coins over the counter. as they carry lower premiums than gold bullions. The most commonly available kilo gold bars are the PAMP and the Royal Canadian Mint (RCM) gold bars.15 troy ounces each.
The PAMP certificate
Buying gold coins is a popular way of holding gold. Again.see 'Accounts' below. One of the most popular gold coins is the American Eagle bullion coin. Gold bars for sale include 1-oz gold bars.e. Bars are increasing in popularity as investment vehicles. Because of the many difficulties of transporting. PAMP kilo gold bars usually come with certificates.99% pure) and contain 32. 10-oz gold bars. All these gold bars are . which is guaranteed by the United States Government and has been in circulation for over 300 years. plus a premium above the gold spot price.
It seems that the
gold bars are primarily sold as kilo bars rather than 1-oz gold bars.
. It is estimated that the premiums on kilo gold bars can be at least $50 per ounce less than the premiums on bars such as the American Gold Eagles. storing and verifying pure gold bars.9999 fine (99. an increasingly popular method of investing in gold bars for the small investor is via allocated holdings using a gold account . held directly by you or in your own safe) or indirectly (held in a safe deposit box or bank vault on your behalf).99 pure. and 100gram gold bars. actually consists of the PAMP hallmark on the gold bars.Tola. The American Eagle coins contain a stated amount of pure gold and are made in four denominations. Gold bars can be held either directly (i. Typically bullion coins are priced according to their weight. kilo gold bars. Kilo gold bars are .
insurance. are investment companies that are legally classified as open-end companies or Unit Investment Trusts (UITs). Gold ETFs represent an easy way to gain exposure to the gold price.103 grs). Typically a small commission is charged for trading in gold ETFs and a small annual storage fee is charged.916 and have a face value of $50. but that differ from traditional open-end companies and UITs. and originally represented exactly one-tenth of an ounce of gold. The main differences are that ETFs do not sell directly to investors and they issue their shares in what are called "Creation Units" (large blocks such as blocks of 50. Exchange-traded funds. and management fees are charged by selling a small amount of gold represented by each certificate. Gold certificates may be described as the first paper bank notes. New York and Sydney. Usually. Also. the Creation Units may not be purchased with cash but a basket of securities that mirrors the ETF's portfolio. instead of storing the actual gold bullion. Gold certificates allow investors to buy and sell the security without the inconvenience associated with the transfer of actual physical gold.000 shares). The actual gold content of these coins is 1. or ETFs. They were first issued in the 17th century when they were used by goldsmiths in England and The
. Gold Bullion Securities (ticker symbol "GOLD"). The annual expenses of the fund such as storage.The standard gold eagle coins have a fineness of 0. The first gold ETF. 
Gold exchange-traded funds (or GETFs) are traded like shares on the major stock exchanges including London. so the amount of gold in each certificate will gradually decline over time. was launched in March 2003 on the Australian Stock Exchange. ¼ and 1/10 ounce sizes. without the inconvenience of storing physical bars.0 troy ounce (31. the Creation Units are split up and re-sold on a secondary market.
A certificate of ownership can be held by gold investors. These US gold eagle coins are also minted in ½.
The United States Government first authorized the use of the gold certificates in 1863. Gold accounts are typically backed through unallocated (fungible or pooled) or allocated (also known as non-fungible) gold storage. such as gold forwards. the gold certificates began being issued in the United States when the US Treasury issued such certificates that could be exchanged for gold. provide contract for difference (CFD) or spread bets on the price of gold. gold futures are traded on the National Commodity and Derivatives Exchange (NCDEX) and Multi Commodity Exchange (MCX). IG Index and City Index. gold certificates are still issued by gold pool programs in Australia and the United States.. CFDs and spread betting
Derivatives. all from the UK. as well as by banks in Germany and Switzerland. futures and options. Firms such as Cantor Index. the gold certificates stopped circulating as money. gold futures are primarily traded on the New York Commodities Exchange (COMEX). a division of the New York Mercantile Exchange (NYMEX). Nowadays. In the early 1930s the US Government restricted the private gold ownership in the United States and therefore. and NYSE Liffe US. Two centuries later.
Derivatives. for example through bailment or within a trust. Bailment is the legal action of a client entrusting their physical property to another party for safekeeping. In India. Digital gold currency accounts and the BullionVault gold exchange work on a similar principle.S.
Most Swiss banks offer gold accounts where gold can be instantly bought or sold just like any foreign currency. Different accounts impose varying levels of intermediation between the client and their gold. CMC Markets. currently trade on various exchanges around the world and over-the-counter (OTC) directly in the private market. and paying for the service. In the U.Netherlands for customers who kept deposits of gold bullion into their safe-keeping.
When the forward sale comes to delivery.Gold derivatives: basic principles
In its most simplified form. It is this liquidity which then allows for the execution of all further derivative transactions. In theory. The proceeds of this sale are invested and earn interest at money market rates. This is why hedging of this nature is sometimes termed ―accelerated supply‖. With respect to producer hedging. which effectively adds to supply in the very short term. To fund the purchase. the bullion banks contract to buy gold forward from mining companies. the bullion bank then repays its borrowed gold to the central bank and the transaction is unwound in its entirety. 3. In essence it mobilises metal inventories by bringing this metal into the active market. contracts to buy gold forward from a speculator (eg a hedge fund or a bank‘s proprietary trading desk). more commonly.
. thus maintaining the liquidity to fund further derivative transactions. However. instead of contracting to buy gold forward from a mining company. Thus under these conditions. 4. this can place pressure on the gold price. the producer delivers either newly-mined gold or gold purchased in the market to the bullion bank at the contract price. the central bank rolls over the loan. the transaction can be described as follows: 1. In the absence of compensating factors. the bullion banks sell an equivalent amount of gold borrowed from central banks. To fund the transaction it once again sells the gold borrowed from the central bank and invests the proceeds on the money market. the borrowed gold is sold. In this case the bullion bank.Gold is leased by central banks and other holders to commercial/bullion banks and thus earns for the lender a return in line with the gold lease rate. 2. The transaction in respect to speculative short-selling has an identical effect on the gold market to that of mining companies (except possibly that mining transactions typically involve a longer time horizon).
but like financial assets. Demand for individual financial assets tends to be highly elastic. gold is bought to be stored or kept rather than to be consumed. There are very many different financial assets. The existence of an active lending market with rather stable and low interest rates is quite typical of financial assets.What is special about investing in gold?
Gold is in many ways more like a financial asset than a commodity. If a derivatives market does make it easier for producers and speculators to sell gold short. which pays no dividends or coupons. and buy or sell the underlying asset. If gold behaves like a typical financial asset one would expect it too to have a very elastic price schedule.
. or that a moderate reduction in expected returns on gold would cause most holders to liquidate their portfolios. Most private and institutional investors hold little or no gold. most of which are very close substitutes for each other. Investors buy an asset if its risk adjusted return is higher than the market. Even if the derivatives market causes investors to rebalance their portfolios. demand depends not on the price of the asset but on its expected return. The pattern of investors who hold gold is not like that for other financial assets. In classic portfolio theory. large changes in holdings can be accommodated with very little shift in prices. In many markets equities can be borrowed at a rate which is only a small margin above the dividend yield. The lending market for gold is also far more developed than for a typical commodity. can be borrowed at a rate close to zero. Unlike most other commodities. then a small price reduction would suffice to attract new investors into the market to take the opposite side of the transaction. Demand for financial assets tends to be measured as a stock – so many billion dollars – rather than as a flow – so many dollars per year– because investors who currently hold the asset can and will sell their holdings in their entirety if the expected return is too low. All these features of financial assets help ensure that the growth of a derivatives market is unlikely to have a destabilising effect on prices. But there are reasons for doubting that the elasticity of demand for gold is so high. Liquid bonds can be borrowed at a rate only a small premium to their running yield. From this perspective it is not surprising that gold. If gold were like any other financial asset the evidence in the preceding section suggests little reason to believe that the derivative market is likely to distort the cash market. Most of the gold that has ever been produced is still available and could come back to the market under appropriate conditions.
someone who holds all their financial wealth in the form of gold will have a cash demand for gold which may be largely independent of either the price of gold or of the expected rate of return on holding gold. This means that the price elasticity of demand is close to unity. While it is hard to separate consumption and investment motives for purchasing jewellery. For example. since a 10% increase in the gold price will reduce the volume of gold bought by 10%. For these investors.Investors who hold gold do so at least in part because gold has certain properties which make it peculiarly attractive in the event of acute political or financial instability.
. it is likely that both the price level of gold (for consumption) and the expected return on gold (for investment) play a part in determining demand.Gold is also unlike a financial asset in that there is substantial consumption demand for gold. gold is not readily substitutable by other assets. Their response to changes in expected returns may be relatively small.
. are closely monitoredand scrutinized in order to determine whether the economy is accelerating or decelerating in order to determine future movements in the rate of inflation. annual inflation is also erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy. A chief measure of price inflation is the inflation rate. and debt relief by reducing the real level of debt. e. Negative effects of inflation include a decrease in the real value of money and other monetary items over time. but their predictive power has been found to hold only for some periods. or may lead to reductions in investment of productive capital and increase savings in non-producing assets.1.4. High inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in the future. and only for certain countries. Several leading indicators are monitored by central banks and other agents in the economy in order to forecast the inflation rate.6. When the price level rises. as the capital required to retool companies becomes more elusive or expensive. the annualized percentage change in a general price index (normally the Consumer Price Index) over time. Inflation's effects on an economy are manifold and can be simultaneously positive and negative. inventories and durable consumption. GOLD V/S INFLATION (CPI)
Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. each unit of currency buys fewer goods and services. to name but a few. uncertainty about future inflation may discourage investment and saving. Positive effects include a mitigation of economic recessions.g.6. GOLD IN CORRELATION WITH THE ECONOMIC INDICATORS 4. selling stocks and buying gold. This can reduce overall economic productivity rates. consequently. Financial asset prices have also been found to possess useful leading indicator properties since their rates of return should embed inflation expectations. Variables such as exchange rates.
4. We can visibly infer that the correlation between the gold returns and the inflation differential is negligible.00 Gold price
10. with peaks in the gold price tending to lead peaks in the CPI.
FIGURE SHOWING THE RETURN ON GOLD AND THE CHANGE IN
-20.037945. Further the calculation of the regression gave the Beta as 0.00
The Correlation between the returns on gold and the differential annualised inflation CPI (with the base year of the year 2000) is 0.A cursory glance at gold‘s performance in the years since The Golden Constant was first published shows an intuitive relationship between changes in the gold price and changes in the US consumer price index.
.1. To get the correlation between the gold and the inflation the percentage changes were considered compared to the previous year. Therefore we can safely assume that there is no prominent relationship that exists between gold and inflation.037945.00
The above graph shows the movement of returns on gold and the differential inflation 1981 to 2009.106131. indicating that with every one point of change in the gold price there is a very minimal change in the inflation (CPI) of 0.00
change in inflation
5 per cent in contrast with a growth of 25. Between December 2009 and February 2010.6. Imports of edible oil and pulses. however.4.
. Cumulatively. gold and silver. after declining since December 2008 for eleven months. oil imports have increased during the recent period.9 per cent a year ago. exhibited reversal in trend in November 2009 with an increase of 2.0 per cent. import growth averaged at 43. which resulted from lower international crude oil prices during the period and slowdown in domestic economic activity. witnessed considerable growth. reflecting domestic supply constraints and higher prices
4. The commodity-wise imports during April-September 2009 indicated slowdown in non-POL imports. iron and steel. Reflecting the increase in gold prices and the higher volume of gold imports on account of the economic recovery.4. FIGURE SHOWING THE RETURN ON GOLD AND THE CHANGE IN THE
IMPORTS OF INDIA
140 120 100 80 60 40 20 0 1971-72 1973-74 1975-76 1977-78 1979-80 1981-82 1983-84 1985-86 1987-88 1989-90 1991-92 1993-94 1995-96 1997-98 1999-00 2001-02 2003-04 2005-06 -20 -40 -60 2007-08 gold prices Imports
0. The uptrend in imports continued through February 2010. GOLD V/S IMPORTS
India‘s imports. chemicals. during 2009-10 (AprilFebruary).21502 is the correlation that exists between the returns on gold and the differential imports of India. pearls.3.6 per cent. precious and semi-precious stones. which was mainly due to sharp decline in imports of capital goods. imports recorded a decline of 13.
The Stock Exchange.Since then. FTSE. All major index providers like MSCI. SENSEX is a basket of 30constituent stocks representing a sample of large. S&P and Dow Jones use the Free-float methodology. SENSEX is not only scientifically designed but also based on globally accepted construction and review methodology. GOLD V/S SENSEX
For the premier Stock Exchange that pioneered the stock broking activity in India. As per this methodology.4. The index is widely reported in both domestic and international markets through print as well as electronic media. Mumbai (BSE) in 1986 came out with a stock index that subsequently became the barometer of the Indian stock market. Mumbai" by paying a princely amount of Re1. liquid and representative companies.
The growth of equity markets in India has been phenomenal in the decade gone by. The journey in the 20th century has not been an easy one.4.6. 2003. Till the decade of eighties. First compiled in 1986. STOXX. The "Free-float Market Capitalization" methodology of index construction is regarded as an industry best practice globally. The Index was initially calculated based on the "Full Market Capitalization" methodology but was shifted to the free-float methodology with effect from September 1. The SENSEX captured all these events in the most judicial manner. there was no scale to measure the ups and downs in the Indian stock market. A lot has changed since 1875 when 318 persons became members of what today is called "The Stock Exchange. the level of index at any point of time reflects the Free-float
The base year of SENSEX is 1978-79 and the base value is 100. Right from early nineties the stock market witnessed heightened activity in terms of various bull and bear runs. One can identify the booms and busts of the Indian stock market through SENSEX SENSEX is calculated using the "Free-float Market Capitalization" methodology. the country's capital markets have passed through both good and bad periods. 128 years of experience seems to be a proud milestone.
Therefore it is apparent that the effect of gold prices in negligible when it comes to the BSE SENSEX. The regration of the gold returns to that of the BSE comes up to 0. prices of the index scrips. The Divisor is the only link to the original base period value of the SENSEX. This market capitalization is further multiplied by the free-float factor to determine the free-float market capitalization.
4. It keeps the Index comparable over time and is the adjustment point for all Index adjustments arising out of corporate actions.178412. The base period of SENSEX is1978-79 and the base value is 100 index points. The calculation of SENSEX involves dividing the Free-float market capitalization of 30 companies in the Index by a number called the Index Divisor. This is often indicated by the notation1978-79=100. The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company. FIGURE SHOWING THE RETURN ON GOLD AND SENSEX RETURNS
100 80 60 40 20 0 -20 -40
gold prices annualized sensex
The return on gold correlates to the return on the BSE SENSEX to the extent of 0.5.market value of 30 component stocks relative to a base period.069205. are used by the trading system to calculate SENSEX every 15 seconds and disseminated in real time.
1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
. which is not a very strong relationship. replacement of scrips etc. During market hours. at which latest trades are executed.
Silver ratio varied between 50 and 70.
The price relationship with silver is 0.
4. This is because in a booming economy where silver has a number of industrial uses.6. stabilizing and narrowing towards a mean of 60. through the start of the Iraq war. the price of silver was rising consistently.
. the commodity was considered to be much more valuable to gold & hence preferred to gold. through the Y2K scare and the economic collapse of 2000. Here we can clearly see that the interrelationship between gold and silver is quite strong.5. the Gold.6. to 80 times silver in 2003 & 60 times silver in 2005. As fear replaced confidence. Gold Mumbai Rupees per 10gms. From early 2004 to now.740537. Gold began to be accumulated more than Silver. From 1998 through 2008. which is about where we are now.1998. Gold relative to Silver increased in value. GOLD V/S SILVER
The prices of gold & silver are viewed differently in different market environments. starting with the Hedge Fund and Asian crises. FIGURE SHOWING THE RETURN ON GOLD AND
70 60 50 40 30 20 10 0 Silver Mumbai Rupees per kg. Suddenly Gold as money was deemed an important crisis commodity. During the period between 1990. doubling from 40 times silver in 1998.4.
FINDINGS AND CONCLUSION
5.75 tons of gold forming about 6 per cent of the current value of its total foreign exchange reserves. 400 million in value held in gold. in theory. The essential features of the gold standard in theory rest on the idea that inflation is caused by an increase in the quantity of money The gold standard. The main producers of Gold are Hutti Gold Mines and Bharat Gold mines Ltd
. and official international institutions. one that has expanded considerably during its period of liberalisation. limits the power of governments to cause price inflation by excessive issue of paper currency
Gold as a Reserve Asset
Central banks. The Reserve Bank of India (RBI) holds 357. have been major holders of gold for more than 100 years. with not less than Rs. Gold can play a crucial and strategic role in central bank reserve mobilisation in case of need. Sales have averaged 676 tonnes per annum over the past decade Indian gold demand is firmly embedded in cultural and religious traditions. Traditionally most investment has taken the form of physical gold.
Role of Gold in Indian Economy
India is the world‘s largest gold market in volume terms. gold bullion and foreign securities. Findings Gold Standards
The gold standard is a monetary system in which the standard economic unit of account is a fixed weight of gold.1. The original RBI Act (1934) obliged the Reserve Bank to hold 40% of its assets in gold coin.5.
CFDs and spread betting
Gold V/S Inflation (Cpi)
The Correlation between the returns on gold and the differential annualised inflation CPI (with the base year of the year 2000) is 0.Gold as an Investment Instrument
Gold investment demand can be split broadly into two. which is not a very strong relationship.21502 is the correlation that exists between the returns on gold and the differential imports of India.106131.
Gold V/S Imports
0. Investment vehicles o Bars o Coins o Certificates o Exchange-traded funds o Accounts and o Derivatives.740537. Private sector holdings come in the form of bars and coins.
Gold V/S Silver
The price relationship with silver is 0.\
Gold V/S Sensex
The return on gold correlates to the return on the BSE SENSEX to the extent of 0. Here we can clearly see that the interrelationship between gold and silver is quite strong.069205.178412. The regration of the gold returns to that of the BSE comes up to 0.
. private and publicsector holdings.
as gold is perceived as an hedging instrument. as emotional sentiments play a major role where gold is considered. investors turn towards gold when there is a bearish trend. By establishing the relationship between the return on gold over a period of years and the various economic indicators we can come to the conclusion that though gold is one of the most valuable metal and the most sought after commodity.5. Through the studies done in tis report we can conclude that the gold price is not the best of the indicators of the economy.
. The same thing holds true for the relationship between gold returns and the returns on SENSEX. the gold prices do not really indicate the course of the economy. We observed how gold affected the world economy during the prevalence of the gold standards. its rise to its eventual fall. Not only economical but also culturally.2. The relationship that gold has with inflation is nothing but a perceptual link that exists only in the minds of the investors and buyers. Conclusion
Throughout the report we can clearly make out the importance of gold in India.