Has Gold Lost all its Shine?

Posted in Finance Articles, Total Reads: 675 , Published on 08 August 2015
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Gold which was considered as sign of prosperity has seen losing its shine. The price of gold has seen considerably dipping from its 2011 high, which was on its peak at $1900 per ounce in 2011 has fallen to $1200 per ounce in 2015 globally. If we go for the current scenario, it has fallen 26% in last 6 months and it is expected to fall more in coming days. Now, before understanding why the price of the gold has been declined in this period, let us first know how the price of gold has considerably risen which was nearly flat or constant in almost three decades from 1980 to 2008. In 1980, gold which was priced at $850 per ounce touched $1000 per ounce mark in 2008 and that too for a brief period before falling to a remarkably low of $700 per ounce due to financial crises or recession.


The consequence of global financial crises has led to the introduction of unconventional monetary policies in almost all industrialised countries like nearly zero interest rates and steering towards quantitative easing. Due to this every country’s central bank including US Federal Reserve forced investor to invest their money in gold and other solid asset. This led to surge in price of gold which reached its all-time high of $1850 per ounce in September 2011.



Image: pixabay


But in 2011 US suffered a heavy blow from debt ceiling crises, which is in connection with maximum amount of borrowing that the US government should be allowed to undertake. This high price of gold helped US government to attend stable condition to some extent. It also aid in stitching a deal which allowed the treasury to increase its borrowing limit, as it was evident that US government is running out of money due to debt ceiling crises, which in turn causes the gold to lose its value. We can simply say that gold prices are inversely proportional to value to value of the world reserve currency-dollar i.e. when gold prices decreases, value of dollar increases and vice versa. But now the whole scenario has changed, US economy has not only recovered from financial crises with even low inflation, but also openly resisting the predication of any downfall of US economy.


With US reaching at stable position and with stronger dollar value, the decline in the demand of gold from china and an increase in interest rate by the US Federal Reserve are considered to be factors for the downfall of prices of gold. The US dollar being emerging as the strongest economy against among all other economies in the world against the Greece crises diverted the investors to look for a safer economy. Gold which is said to have a property of attracting investor and being considered to be safe heaven asset has seen on lower side against the strong dollar and also making people less pessimistic about fiat currency.


In case of India which imports all of its gold requirement and pricing depends upon international market, so the fall in world prices also led to lower prices of gold in India. People in India usually buy gold in festival but this year the scenario has changed somewhat, with people buying less gold this year in comparison to previous year. Even the investor are investing less money this year in gold to average out the last year purchase. People are more prudent towards holding dollar and selling gold first. People now consider other things like land, dividends and interest from shares more important than gold since it does not generate income as other ones, and also it is not a utilitarian product


With the present condition, the strong dollar value and increased interest rate by US federal it will be very difficult for gold to cross its current price. Also the Greece crises and its exit from euro zone, nuclear deal between major world power and Iran, also make it impossible for gold to break the shackles and emerge as a main player in the international market. Gold purchase in India mainly depends upon rural area which in turn depends upon monsoon condition and we are well aware of the monsoon condition in India, gold purchase has been on a lower side which further reducing its value.


With all this issues and the condition we discussed it seems near to impossible that gold will regain its value in the near future as the dollar has made a significant effect on all other economy and trade and emerge as the most powerful economy of the world.

 

This article has been authored by Swapnil Zunke from IIM Kashipur 


References:

http://indianexpress.com/article

http://www.thehindu.com/busines

http://www.cmegroup.com/education

 


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