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Impact of Gold On Economy
Impact of Gold On Economy
A
Carat (Karat in USA & Germany) was
originally a unit of mass (weight) based
on the Carob seed or bean used by
ancient merchants in the Middle East. The
Carob seed is from the Carob or locust bean
tree. The carat is still used as such for the
weight of gem stones (1 carat is about 200 mg).
For gold, it has come to be used for
measuring the purity of gold where pure gold is
defined as 24 carats. How and when this change
occurred is not clear. It does involve the
Romans who also used the name Siliqua Graeca
(Keration in Greek, Qirat in Arabic, now
Carat in modern times) for the bean of the
Carob tree. The Romans also used the name
Siliqua for a small silver coin, which was
one-twenty-fourth of the golden solidus of
Constantine. This latter had a mass of about
4.54 grams, so the Siliqua was approximately
equivalent in value to the mass of 1 Keration or
Siliqua Graeca of gold, i.e the value of 1/24th of
a Solidus is about 1 keratian of gold,i.e,1carat of
gold.
POINTS TO BE NOTED:
Gold is valued in India as a savings and
investment vehicle and is the second
preferred investment after bank deposits.
GOLD INVESTMENT
T
MARKET IN INDIA
here were also some concerns raised on the
disproportionate gold consumption pattern in
India versus the US. “Though India is the largest
consumer of gold, its annual per capita
9 IMPACT OF GOLD MARKET ON ECONOMY
consumption is half of that in the United States,
as Indians invest mainly in the physical form of
gold,” World Gold Council (WGC) Associate
Director Keyur Shah said. According to WGC’s
‘Gold Demand Trends’ report, released by
precious metals consultancy GFMS, total
identifiable tonnage demand for gold fell 19
percent in the second quarter of 2008 to nearly
736 tonnes, but in value terms it rose nine
percent to a record level of over $21 billion.
Second quarter jewelry demand was the
biggest contributor to the overall decline, falling
24 percent to 504 tonnes. In the first quarter,
the total identifiable tonnage demand for gold
fell 16% to 701 tonnes, the lowest quarterly level
on record since 1993.
“Jewelry has been and is the bedrock of the
gold industry, and we see that the willingness
to buy jewelry is at a very high level as the
consumers have started to think prices will
increase further. But imbalances in the market
suggest that sooner or later the gold price will
have to fall,” said Walker.
A
s Dow Theory Letters’ Richard
Russell once said, “It’s not about
what the price of gold is, it’s
about how many ounces you have.”
Tanishq’s vice president, V
Govindraj, shared some experiences
with retailers on selling more ounces to their
customers, and how they can revolutionize their
businesses by putting in minor but significant
efforts. He also explained the importance of
making differentiation points in designs to make
this aspect a unique selling point.
Interestingly, he also raised a point on the
industry’s need to create more means of
marketing, akin to creating new celebration
days like Mothers Day and Raksha Bandhan.
“The retail space also should seduce the
customer, giving them the enjoyment of
shopping. Products need to tell a story, and the
product display too should communicate with
the customer. Mean-while, retailers should
create an interest among consumers through
print, and outdoor banners. The best way to
A
INDIAN STAND
ccording to the World Gold Council, India is the
world’s largest market for gold jewellery. In
accordance with the global financial crisis,
Indian stock market has also witnessed its
worst hits in the last one month. The price of
gold has been volatile with big swings. In spite
of fluctuations in price, gold has consistently
regressed to its historic purchasing power
parity with other commodities and intermediate
products.
T
he price of gold depends on a host of
factors, which makes it very difficult to
predict. In a fashion similar to shares,
gold is an asset class by itself. In fact, in many
villages and small towns of India, gold is
preferred to bank deposits as a savings and
investment instrument.
O
ut of the several options available for
investing in gold, Gold ETFs is the
recent avenue. An Exchange Traded
Fund (ETF) is an open-ended fund that
can be traded like a share on a stock exchange.
It is a collective investment scheme that invests
in a combination of asset classes. Consequently,
prices are determined by the value of the assets
the ETF holds.
POINTS TO REMEMBER
Objective of the GOLD ETF is to generate
returns that closely correspond to the
returns provided by in vestment in physical
gold in the market (domestic market),
subject to track in g error.
T
he recent financial turbulence centered in
the US has engulfed emerging financial
markets. The global meltdown has
affected huge amounts of shareholder wealth.
It has literally devastated fortunes of all kinds
of scrip, be it a large-cap, mid-cap or small-cap.
Everything was so uncertain.
U
ntil recently gold production was limited
to a few mines in South Africa, the US,
Australia and Russia. However, gold
mines now operate in more than 55 countries,
with China leading the race. Total supply in 2007
fell marginally by 1.6 percent, which comprised a
29 percent fall in supply from official sector sales
and a 14 percent rise in old gold scrap sales.
Mine production, which contributed the
majority 63 percent to total supply in 2007, fell
a modest 0.4 percent, pushing down total
output to an 11 years low.
DEMAND DYNAMICS:
BOTTOM OF PYRAMID
OPPURTUNITIES
46 IMPACT OF GOLD MARKET ON ECONOMY
In efforts to sell more, the industry has
to search for newer means and avenues, and
one such untapped area is the bottom of the
pyramid (BOP), which comprises consumers at
the lower end of the market, the largest but
socially poorest economic group. India has a
huge untapped BOP market, and one company
that is providing access to the poorest section of
society is precious metal is the Muthoot
Pappachan Group.
Thomas Muthoot from the Muthoot
Pappachan Group shared his experiences and
the idea of tapping this section of the market.
The group introduced a scheme ‘Swarna
Varsham’, in which the consumer can pay an
equal daily investment which is similar to the
equated monthly installment (EMI) system. “It
is paid on a daily basis and begins at as low as
Rs16. Through this system, the consumer can
make the physical purchase of the products once
their investments have reached the price of at
least a gram of gold.” The group has increased
its customer base from 10, when it began this
scheme, to more than 500 people now.
CONCLUSION
The US subprime financial crisis had a
47 IMPACT OF GOLD MARKET ON ECONOMY
direct impact on the global gold market in the
quarter of 2007, as safe haven investors
spurred record inflows into gold exchange
traded funds.
Financial markets are responding to the US
dollar decline and near recession situation in
the US economy by switching their investment
away from the US dollar. Exporters of different
currencies have started billing their exporters
in currencies other than the US stocks and
bonds, and are increasing investments in
commodities including precious metals and soft
commodities as a hedge against the decline in
the US dollar. Even retail investors in the US are
reducing their US dollar-based investments.
Thus, if this trend continues, Gold along
with the basket of currencies including Chinese
renminbi may replace the US dollar over the
coming years. However, the Federal Reserve
will not sit and see the decline of the US dollar.
It will take steps to stimulate the US dollar’s
decline. Whether such steps are successful or
not is something only time can decide….
BIBLIOGRAPHY
The ICFAI University Press- The Analyst
January 2009*
March 2009*
May 2009*
49 IMPACT OF GOLD MARKET ON ECONOMY
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