What Led To The Reversal Of Fortune For Gold?
Gold has historically enjoyed an indomitable reputation as the safest medium for world's trade and exchange. In times good or bad, during peace and war, upheavals and turmoil, gold has remained the most dependable bulwark for stability and universal acceptability. No wonder, from money-lenders to monarchs, coup leaders to corporate houses, banks to village banias, gold has remained the bulwark against instability and confusion. Investors, governments, and small-time domestic savers, all love and repose their wealth on gold as the insurance against hard times. Currency notes, and plastic money, despite their universal use, can never equal gold in the perception for stability.
A few years back gold saw a continuous surge in its prices. The higher the prices rose, the greater became the demand to own it. Thus, surging prices and increasing demand nudged each other along an upward curve. For hedging against inflation, gold became the most preferred commodity.
Now, this bastion of is shaking as gold prices, quite intriguingly, has been sliding. For the community of fund managers, investors and savers, it has brought a big headache. Gold prices have already fallen to their lowest level since 2010. The 12-year bull run has been overtaken by bearish tendencies. From its price peak at $1,923 an ounce in 2011, the prices have fallen to $1,148 an ounce. That is about a 40% drop.
During the global financial crisis in 2008, when fear and insecurity gripped the banks and the business community, there was a rush to sell off stocks and buy and gold. Major currencies like the dollar and euro lost value as the economies in respective countries floundered. Investors scampered to buy gold. Precious metals-backed exchange traded funds moved to stock up gold, adding to the increase in prices. The contagion soon engulfed the sea of middle-class people who, sensing the sharp erosion of their bank savings, rushed to the nearest jewellery shops to buy gold. It was a vicious cycle of fear-driven demand and rumour-driven loss of faith in all other forms of assets, including the iron-clad fixed deposits in nationalized banks.
Fortunately, curtains have begun to come down on this highly destabilizing phase of international finance. Holdings in global gold exchange-traded funds have slumped reaching the lowest level in five years. Gold, as a commodity, has shed capital locked in it in huge amounts.
What led to this reversal of fortune for gold? The decision of the U.S. Federal Reserve (FED) to wind down is, logically, the most important contributing factor. Some $4 trillion was injected into the economy through this initiative to spur growth. A good amount of this money had got sucked by gold and stock markets around the world.
Fall of gold prices is good news for India - the largest importer of gold in the world. The Reserve Bank of India has relaxed the tight controls it had clamped on gold imports two years back to curtail out go of precious foreign exchange. The government can breathe a little easy as it mulls reducing the gold import controls further. This could reduce illicit bringing in of gold into the country as smugglers will see little incentive in their trade. For the jewellery industry, this will be real good news.
