In the last ten years Indian gold prices have risen by around 520 per cent (from Rs 5,700 to Rs 30,200). With rise in prices of gold, price volatility has also risen in a big way. Pure gold jewellery sales seems to be loosing to silver, diamonds and others. Pure gold jewellery workers has been displaced and some of the centuryold gold jewellery designs have vanished due to change in consumer taste and preference. Branding of gold and other forms ofjewellery along with very sharp rise in gold prices over the past five years has led to closure of small shops in every nook and corner of India.
MCX, NCDEX and Comex future prices are the base for gold. Jewellers are partially right in blaming these commodity exchanges for their woes.
The advent of the US dollar had changed the outlook on gold. Let’s go back in history as to how the US dollar came into being, before I give my opinion on gold prices.
In 1862, the U.S. government began issuing its nowfamous greenback dollars: U.S. Notes unbacked by gold or silver. These served as legal tender (compulsory) currency. The wartime issues were limited to $450 million. They began to be redeemed by the government in 1866, but the recession of 1867 halted this. A total of $356 million were allowed to remain in circulation. They are still in circulation. They are not common. Federal Reserve Notes are the common currency.
Prior to 1862, currencies were private, and private currencies varied in value. There was no agency to guarantee their value. There were no legal tender laws. Nobody was compelled to accept any bank’s currency notes. When gold coins circulated, they were familiar to most Americans. They were perceived as money. So, they were money. They functioned as money in exchange. From 1934 until 1971, the official price of g: did not rise. The dollar’s purchasing power fell.
Bretton Woods Agreement
During the second world war, international trade suffere-: with runaway inflation and devaluation of currencies. 2. need was felt to bring out a new monetary system :- – would be stable and conducive to international trade. – – process was started in 1943 by Britain and the US a- : finally in July 1944 the American proposal was accep:e: at the Bretton Woods conference.
The new system aimed to bring about convertibility of all currencies, eliminate exchange controls and establish an international monetary system with stable exchange rates. The International Monetary Fund (IMF) was se: up in 1946 under the Bretton Woods agreement and the new exchange rate system also came to be known as the Bretton Woods system.
Reasons for subdued gold prices till 2001
■ The U.S. was on a government-defined gold standard, the government bought and sold gold in a narrow trading range. Gold was not a free market commodity. It was a rigged commodity. That is what a government-enforced gold standard is: a rigged market.
■ Gold became a bubble commodity, from 1976 until January, 1980. The bubble burst as a result of the Federal Reserve System’s tight-money policy, launched in October, 1979. Gold fell so far that it did not recover when the FED reversed policy in August, 1982. when the Dow Jones Industrial Average fell below 800. The Mexican government threatened a default on all international loans to its banks. The FED inflated, bailing out the Mexican banks.
■ Gold went down after January, 1980, as did most commodities. Anyone holding commodities for two decades lost his money.
■ Prior to 1933, American banks were allowed to go bankrupt, taking depositors’ balances with them. No longer. The FDIC officially insures deposits up to $100,000.
■ The United States government was legally obligated to pay a fixed amount of paper money in exchange for an ounce of 0.999 fine gold. This was a legal price floor for gold.
■ Gold coins circulated as money. The public was familiar with gold.
Today, paper currency circulates and every central bank has been printing currency notes faster like never before in history. People have realized that the paper currencies which they hold will depreciate far more quickly than gold. This the key reason for the huge spike in every form of gold investment demand in the past decade. Death of paper currency and the rise in value of gold as an alternate currency of the future is the main reason for gold price hike.
Global financial systems vs MCX/NCDEX
Global money supply is at a historical high. Excess money has not created any safe investing avenues. Investors are forced to invest in gold futures and gold exchange traded funds for safety of their investments.
Central banks & gold price hike
Central banks of the developed nations are responsible for the current gold price rise as they believe that supplying the world with free money can cure fundamental ills of their economies instantaneously. If the current zero interest rate policy remains in place for longer duration, then in the next five years there will be a sustained recession and gold prices can spike between Rs 45,000-Rs 50,000 (per ten grams) by the end of 2018.
Jewellers need to adjust to high prices and ensure that their sales as well as profit margins increase. The UPA government has increased custom duties on gold imports twice in the past one year. The government wants to ensure that there is reduced investment in gold.
However, the government is unable to differentiate between gold for jewellery purposes and gold for investment purpose which has increased jewellery prices. It’s our business and we need to protect it and be competitive. If you cannot do it on our own, take the help of an expert. If there is more than one jewellery shop in your city which is on the verge of closing down, merge them. For example. say there are four different jewellery shops in a city which are on the verge of closure. This information can be known through the bullion association of your city and/or the bullion association of every city should take steps to pass information as to which jewellery shops are on the verge of closure. The owners of these shops can meet together and create a partnership firm or any other entity, place manufacturing as well as purchase of materials under one roof to reduce cost.