I have to confess I have always been either cautiously bearish on Gold or quite agnostic – didn’t care one way or the other. But that was many years ago – since then Gold has appreciated by over five times – I do feel stupid but in August company – so its okay. Its a well documented story that Gordon Brown (then Chancellor) sold 470 tons of UK’s Gold reserves (which sadly for UK was sixty percent of its entire reserves) for $250 an ounce which in the peak of the Eurozone crisis in late 2011 , hit $1900+ an ounce. Ouch – how does Gordon Brown sleep at night ? Having said the above I think I am become more positive (from my traditionally negative stance) on Gold lately – I know its already very high , right ?
What Moves Gold
The determinants of Gold are the following (of course no one can claim to exactly know what moves Gold prices)
- Central Bank Purchases (or sales as in the case of UK)
- Indian Imports – Marriage seasons, imports end up as Jewellary and get locked up in vaults – a totall waste of an economic resource, etc
- Rupee – changes in Rupee effects the local gold valuation as it is pegged to the dollar
- Central Bank Easing (whether in the US or in India, this increases the money flow and therefore the price of Gold)
- Flight to Quality – The true currency in the world – prior to the abolishment of the Gold standard every currency note was backed by an equivalent amount of the metal
- Inflation Hedge – the traditional use of Gold
Flight To Quality And The European Union Crisis
I would suspect that the biggest factor for the increase in price of Gold over the last decade has been the flight to quality – Lehman crisis (and the QE’s), followed by the European crisis. I suspect understanding the future price of Gold has something to do with how the Europeans deal with the crisis . The Europeans have shown an amazing inclination to “kick the can forward” i.e. band-aid the immediate crisis without actually resolving it. A resolution of the European crisis needs growth – Greece is in recession, Spain is in recession, UK has too much public spending, France is very socialistic, etc. – it is not clear where growth is going to come from. Do you see how David Cameron is grovelling in front of the Indian politicians so as to not cancel the Augusta deal – they need every additional job in the UK. Europe does not understand the creative-destruction process that makes the US very successful – if a company is performing poorly, sell its assets for better productive use – not that us Indians understand this either – we are still burning good tax payer money over bad companies – Air India, etc.
Positive On Gold
Point is – It is extremely unlikely that the European crisis gets resolved any time soon (read a decade or two) – there may be many shocks in the interim. This is generally positive for the price of Gold for the long term (notwithstanding the recent drop in the price of gold). Also positive for Gold investors in India is that fact that any weakness in the Indian economy translates to a weakness in Rupee therefore increasing the price of Gold in Rupee terms.
Image Source : IANS