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AN OVERVIEW OF GOLD

Introduction

Gold is the oldest precious metal known to humankind. Gold is primarily a monetary asset and partly a commodity. Gold is the world’s ancient international currency. It is an important element of global monetary reserves. Central banks, and official international institutions, have been major holders of gold for more than 100 years and are expected to retain large stocks in future.

Gold has maintained its purchasing power throughout its 5,000 years track record, as the world’s only monetary metal. It is considered as a commodity as it can be acquired and stored in the form of Jewellery, Bars, Coins and Gold Deposits. It is also called precious metal, which means it does not rust (Oxidise) at normal conditions. It is resistant against many acids and a good electric conductor, which makes it useful for electronic circuits. It is useful for ornamentation and rituals because of its inertness.

The peculiar aspect of gold is that it is used as a commodity (production of jewellery and industrial applications), and a financial asset, as it can be used as a store of value. As a financial asset, the demand for gold would be a function of the current and expected price of gold, the opportunity cost of holding gold (which could be the rate of return on a risk-free asset, such as U.S. Treasury bills), income, expected future inflation, and overall financial market conditions.

History has clearly proved that gold prices are famous for being sensitive; in the seventies they rose sharply when the United States ended restrictions on private gold ownership. In the late nineties, it fell sharply after Bank of England announced that it was going to sell gold reserves. Rising uncertainty in the global economy has forced the investors to safeguard their wealth, which is clearly evident from the recent spike in the gold prices. Gold assets in Exchange Traded Products (ETPs) owned nearly 70 million ounces (or 2,150 tonnes) of bullion, worth US $96 billion at the end of November 2012. Investors also prefer to hold onto gold because of the yellow metal’s potential to be a store of value and less volatile corresponding to other asset classes like equities and bonds.

 

 

A Brief History of Gold

  • 3500 BC – The Egyptians were the first to smelt and work gold. They used gold for ornaments, statues and money with King Tutankhamen making his famous coffin out of 100kgs of gold.
  • 564 BC – The Chinese made gold into square coins called Ying Yuan in 564 BC during the nearly 800 year Zhou Dynasty
  • 499 BC – The Ancient Greeks fought the Persians for 50 years for land, power and the legendary Persian gold hoards, with the victorious Alexander’s army returning home laden with gold investments and treasures.
  • 120 AD – At the height of the Roman Empire, its superior money system circulated Roman gold bullion coins like the Aureus between Britain, North Africa and Egypt, providing one of Rome’s many advancements to civilisation.
  • 1500s – Spanish Kings and conquistadors sailed to South America on tales of Inca and Aztec gold. King Ferdinand advised: ‘get gold, humanely if you can, but all hazards, get gold’. Spanish galleons returned home laden with gold destined for Seville, proving an attractive target for Britain’s Sir Francis Drake.
  • 1800s – In the 19th century, the world operated on the Gold Standard between the mid-1800s until 1914. This period of peace, prosperity and rising employment owed a great deal to its strong, stable gold money system.
  • 2000 onwards – since the turn of the millennium financial crises and money printing have helped fuel gold’s popularity again, with 12 years of continually rising gold prices rewarding those who invest in gold.

 

Top Five Biggest Gold Owners In The World

There is no surprise here most of the governments, central banks, and investment funds are the world’s largest holders of gold reserves.

  • The United States holds the largest gold reserve in the world. With 8,133.5 tones, U.S. gold holdings are worth approximately $269.67 billion.
  • Germany is the second most gold owners in the world .With 3,412.6 tonnes, Germany gold holdings are worth about $113.2 billion at current prices, Germany’s gold accounts for almost 70 percent of the country’s total foreign reserves.
  • The International Monetary Fund oversees the global financial system by following the macroeconomic policies of its 185 member countries. It is an organization formed to stabilize international exchange rates and facilitate development and offers highly leveraged loans, mainly to poorer countries.
  • The Italian National Bank manages the country’s large gold holdings, which account for 66.5 percent of its foreign reserves. With approximately 2,451.8 tonnes of gold in reserve.
  • France is responsible for France’s gold holdings, which have been reported at about 2,450.7 tonnes by the International Monetary Fund. With the fifth largest gold reserve in the world, France’s amount to about $81.3 billion.

Importance And Uses

Demand for gold can be divided into three main categories, comprising jewellery, technology and gold investment. This total demand can be split accordingly: 49 percent for jewellery, 36.3 percent for investment and 10.8 percent for technology.

Exhibit- 1.1

Category-wise Demand for Gold

YearDemandTonnesPercentage
2008 – 2009Investment148336.3
2009 – 2010Technology 43910.8
2010 – 2011Jewelry200249.0
2011 – 2012Central Bank net purchases 160 3.9

 

Jewellery

 Gold’s history as jewellery stretches back 6000 years, whilst gold jewellery today is synonymous with power, wealth and love. The purity of gold bullion jewellery is measured in carats, with 24 carat gold being the purest. Whether worn by Roman Generals, Chinese warriors, or modern day footballers and musicians, gold jewellery remains a recognised status symbol.

Figure  – 1.1: Gold Jewellery as Percentage of Total Demand

 

 

Investment

For centuries Kings, rulers and central banks have founded their wealth with gold bullion investment. Gold has proven a sure foundation of nation or city states. Today, with rising gold prices, central bank gold buying and concerns about the financial system, gold remains as important for people looking to secure their wealth. In today’s gold investment market the emerged powers India and China buy over half of each year’s 4000 tonnes supply, whilst individuals across the world are increasingly seeking their own protection in gold.

Figure – 1.2: Gold ETF Holdings

Different cultures bring different attitudes towards gold. Religious and wedding seasons in India and Chinese New Year bring huge spikes in gold investing demand, where many tonnes can be bought in a day. Amongst the great gold buying powers, China’s hunger to invest in gold surpassed that of India in 2011, as the Chinese seek to diversify away from money printing and over reliance on dollars.

Chart – 1.3: Investment Demand for Bar and Coins (Tonnes)

Technology

Gold’s use in mission critical technologies stems from its durability and resistance to corrosion. Silver might be a better conductor, but when failure is not option gold is used in specialist applications, such as: Space Shuttles, fighter planes, mobile phones and telecomms and life-saving medical equipment.

 

World Gold Markets

  • London: London Bullion Market Association (LBMA). It is world’s biggest market major clearinghouse of gold.
  • New York: New York Mercantile Exchange Commex Division (NYMEX) begins trading on 31st December 1974. It is mainly considered as “home of futures trading”
  • Zurich: It is also one of the major spot and future market in Europe mainly known as a “Physical Turntable”.
  • Istanbul: Istanbul Gold Exchange begins trading on 26th July 1995. Major gold spot and futures market are in Turkey and Middle East.
  • Dubai: Dubai Gold and Commodities Exchange (DGCX) begins trading in June 2005. Major spot gold market for Saudi and gulf countries. It is also one of the famous jewelers market.
  • Singapore: It is doorway to South East Asian consuming countries major spot and future market.
  • Hong Kong: It is doorway to China, now one of the major gold consuming country in the world.
  • Tokyo: Tokyo Commodities Exchange (TOCOM) begins trading on 23rd March 1982, major spot and future market in Japan.
  • Shanghai: began trading on 26th July 1995. It is one of the major future centers in China.

 

Factors Influencing Gold Prices

  • World macro economic factors including US Dollar, interest rate and so on.
  • Global gold mine production
  • Demand by Central banks
  • Domestic demand, which is linked to agricultural prosperity and festivals/marriages,
  • Producer / miner hedging interest
  • Comparative returns on stock markets
  • US dollar movement against other currencies
  • Indian rupee movement against the US dollar
  • Geopolitical tensions
  • Global economic situation

 

Gold As Money

Gold has been used as money for thousands of years, and has been the only store of value to truly endure In today’s world of unstable markets and creeping inflation, gold is now increasingly seen as the world’s real reserve currency, with dollars, euros and pounds losing over 90 percent of their purchasing power in the last 40 years alone. As central bankers rely on printing money and national debt levels rise alarmingly, gold’s unique properties as money are being recognized once more.

 

Gold As An Investment

Gold is the oldest currency in the world and is coveted across continents and cultures for a variety of reasons.

Maintains Long-term Value: Market cycles have their ups and downs, but gold has maintained its long-term value. Paper currencies may rise and fall but gold always endures. Gold has demonstrated its capacity to store value for centuries.

Safe Refuge: During times of calamities like war or economic crisis, there may be a negative effect on investments like currencies, bonds and equities, but may have an opposite effect on the value of gold. Also gold is not a liability of any government or corporation and hence it does not run a risk of becoming worthless due to unexpected events.

Inflation Hedge: The value of gold, in terms of real goods and services that it can buy, has remained remarkably stable whereas the purchasing power of many currencies has generally declined.

Helps Build a Robust Portfolio: Adding gold to a portfolio introduces an entirely different asset class. Portfolios that contain gold are generally more robust and better able to cope with market uncertainties than those which don’t. Recent independent studies have shown that traditional diversifiers (such as bonds and alternative assets) often fail during times of market stress or instability. Even a small allocation of gold has been proven to significantly improve the consistency of portfolio performance during both stable and unstable financial periods.

Effective Diversifier: Diverse investments help protect the portfolio against fluctuations in the value of any single asset class. Gold is an excellent portfolio diversifier because its performance tends to move independently of other investments and key economic factors.

Both Tangible and Liquid: Gold is an asset that is both tangible and liquid, unlike real estate which is tangible but not liquid, or company shares and bonds which are liquid but not tangible.

 

Types Of Investments In Gold

Gold can be bought in many different ways – gold bullions, gold coins, gold mutual funds, gold mining stocks, gold futures and gold options.

Gold Bullions: Gold bullions, also known as bars, are generally bought and sold through brokers and gold dealers. They are traded at a price that is above the market price. Once purchased, the bars are usually kept in the custody of the broker or the dealer and you pay for the storage and insurance fees. The dealer will also give you a numbered certificate where the numbers match those of the gold bars you’ve bought. When you sell the bars, you must provide the certificate to prove their authenticity and identity.

Gold Coins: Gold coins are easier to store than gold bars. Though they trade at the same price as gold bars, they are considered to be more cost effective, as you don’t have to pay storage or insurance fees. There are two things to consider when buying gold coins – their numismatic value and the gold content. The former refers to the value of the coins as a collector’s item. The second refers to the amount of gold that has gone into the making of the coin. The higher the gold amount, the more valuable it is.

Gold Mining Companies: Instead of buying gold, buyers could invest in gold mining companies. Bear in mind that the stocks of gold mining companies don’t always follow the trend of gold prices. But over the long term, any short term volatility of stock prices settle down to follow the gold prices in the market. If people want to invest in gold mining stock, try and find companies that have been mining for a long time and have low extraction costs.

Gold Mutual Funds: Gold mutual funds and gold exchange-traded funds (ETF) are another way to invest in gold. As with any mutual fund, gold mutual funds offer a diversified portfolio of gold mining stocks. Look for a fund that has a low expense ratio. Gold ETFs are allowed to own gold bullions without the added hassles of storage and insurance. Many ETF shares are traded on the major stock exchanges.

Gold Futures and Gold Options: Gold futures contracts and gold options can be used to insure already owned gold investments or speculate on future gold prices. In the case of futures contracts, people get quite a lot of leverage and they could make huge profits on your investment. But with the volatility of gold prices, they could also sustain huge losses with the futures contracts.

 

Significance Of Gold In Indian Culture

For centuries, civilisations have reserved gold as objects of luxury believed to be worthy of only gods and rulers. It is one of the posh metals, and holds immense religious magnitude especially in Indian culture. Gold is taken as a sign of supremacy, beauty, and cream of the crop. Many people think that Indians are fanatics for gold. Although this proclamation cannot be entirely denied, but the truth is that Gold always had a particular connotation in all ages.

Gold holds great sacred meaning in Indian culture, as it is considered highly auspicious. Major chunk of Indians believe that their goddess was born from the cosmic egg of gold, and hence buying gold will bring them good fortune, and destiny. Gold is a sign of power and status. Many individuals in India think that gold symbolises wealth. In Indian weddings, gold brought as dowry by the bride, shows her paternal family status and wealth. It is believed that a bride wearing 24k gold on her wedding will bring luck, and happiness throughout the married life.

Indians are passionate about gold, and people often regard it as extremely holy. They believe that gold brings good luck; hence, many people like to start their businesses or any other new affair by purchasing gold, or decorating the idols of their religious gods with gold ornaments.

There are special days in Hindu calendar, which encourage its followers to buy gold on that specific day such as Dhanteras and Dassera. Hindus believe that it will bring good omen if they will make gold purchases on these propitious days. Besides, the Incas have referred to gold as tears of the Sun, which adds more towards spiritual significance, as sun is the sign of authority.

Gold is also bought on festivals like Onam, Pongal and Durga Puja. These are the days when ladies get dressed formally, and wear gold ornaments. They like to wear as much gold as they can; therefore, usually they are shining like bright sun. Gold is also considered to be a good gift item, and usually people exchange gifts made of gold on weddings, birthdays, and other religious festivals. India has a huge cloth making industry, which uses gold thread work in making cultural dresses for special occasions, and it is admired not only by Indian women, but in international women community as well.

Gold is an integral part of Indian culture, and is considered exceedingly sacrosanct. Hindus do not wear gold on foot, as it represents ignominy towards their god. Besides, they believe that if they misplace gold, it will bring bad providence to them.

Gold is clearly visible in every part of Indian life. In Indian culture, women, and gold have remained more near to each other, and this tradition is very old and still continuing. It is an emblem of spirituality and command, and many cultural as well as religious myths are based on it. According to many, it brings prosperity, and opulence.

 

Reasons For Buying Gold by the Indian Households

Though gold has several applications or uses, the main reasons why Indians take to gold are:

  • Gold is considered an equivalent for liquid cash: Gold is highly liquid and portable as a Security or Asset. It can be converted to cash anytime when an emergency arises and is considered a friend in need.
  • Gold is considered as Status Symbol:Especially in India gold symbolizes wealth. In Indian weddings the gold the bride brings in show her family’s status and wealth and forms part of the dowry given to bride. It is believed that a bride wearing 24k gold on their wedding to bring luck and happiness throughout the married life.
  • Gold is a very good investment: Gold is an asset which has consistently increased in value and thereby considered as a safe and secure investment. Gold is considered an effective diversifier which helps to reduce portfolio risk.
  • Gold is considered as a good gift item: It is precious and worthy across all cultures and times. The gold jewelry is given as gifts during weddings, festivals and other special occasions.
  • Gold has great religious significance: Gold is the symbol of the Hindu Goddess Lakshmiand considered highly auspicious. Gold is brought or presented on festivals like Dhanteras and Akshaya Tritiya. Toe rings are never made of gold as it represents the goddess of wealth and should not be soiled by touching a human’s feet.
  • GreatOrnamental Value: Women of every age and time have always loved wearing gold ornaments. Moreover, Gold Ornaments are never out of fashion. It also may be remembered that Wedding rings are also traditionally made of gold to mark a long lasting relationship.
  • Great Value as Heirloom: Gold jewelry is something which can be passed down from one generation to the other as ancestral property.