Gold : four letter word- which influences many middle class / ofcourse all minds. Here let us have some idea about the gold and its role over economy. Recently my mom asked me one question, what is the reason behind the gold rate hike… even sources are telling that rate may increases further.. so before that let us kniw bit about gold….
Gold is accumulated and not consumed; Gold’s price is still a function of supply and demand, but the supply that matters is not the relatively little amount mined each year, which history shows only increases the aboveground stock year after year by a relatively consistent 1.7% per annum. Gold’s supply is the total weight accumulated in its aboveground stock for the simple reason that a gram of gold mined today is no different from a gram of gold mined by the Romans two-thousand years ago. Gold’s price is principally a function of demand.
Then one question will come to our mind, is the price of gold depends on purchase of jewelry?
Here we go; the price of gold does not depend upon jewelry demand. The important point is not the form gold takes when it is fabricated, but rather, the use to which it is put. Most jewelry is high-karat gold acquired because of gold’s monetary characteristics, not for reasons of ornamentation. Therefore, the price of gold – or more precisely because it is money – gold’s rate of exchange to national currencies depends upon monetary demand, or what some people mistakenly call its investment demand. It cannot possibly be otherwise, given that gold’s supply is its aboveground stock and that some 80% of this amount is held for monetary reasons, and not for fashion, adornment or other factors.
Gold’s advantages as money are numerous. Perhaps most important in our present age marked by the constant inflation of national currencies, gold is money that cannot be debased by creating it ‘out of thin air’ by government fiat. Gold is the only money that is not contingent upon anyone’s promise, an attribute that explains why gold is called “sound money”. The US dollar is in trouble because it is being debased – it is being inflated by newly created dollars that are used to fund the growing federal government budget deficits and other public and private debt. This insidious inflation erodes the purchasing power of the dollar month after month. Consequently, more and more people are turning to gold as their preferred money.
Gold and dollars were interchangeable and essentially the same. But no more, to the detriment of those who hold dollars. By some estimates, the dollar has lost more than 90% of its purchasing power since then.
Despite this dreadful deterioration the dollar has suffered, it continues to circulate as currency. Those same inexorable forces that create a hostile environment for gold are at the same time promoting and propagandizing the dollar to talk-up its demand. The Federal Reserve’s pro-dollar, anti-gold propaganda is aimed to maintain the illusion that the dollar is reliable money. Consequently, in contrast to their interdependent and complimentary role under the gold standard, gold and the dollar have become competitors. In fact, gold is the dollar’s only serious competitor. They compete for holders, and it is their relative demand that determines their rate of exchange, or what we call the ‘price’ of gold. Don’t view gold’s price to be rising. Rather, recognize instead that the purchasing power of the dollar is falling. This conclusion can be made clear by looking at the price of goods and services in terms of dollars as well as gold. A barrel of crude oil today costs about the same amount of gold grams as it has at any other time shown on the above chart. So even though the dollar is no longer defined as a weight of gold as it was under the gold standard, this chart clearly illustrates that gold remains the most useful standard by which to measure the price of goods and services.
What’s the role of central banks over gold?
Gold’s value comes from its usefulness, not from central banks. It is important to understand that the market gives gold its value, though central banks would have you believe otherwise. Central banks tell you what they want you to hear. They would like you to think that they control gold’s price, as that perception makes it easier for them to strengthen the demand for the dollar. But the reality is quite different. The market determines gold’s price, just like it determines the price of a essential commodities.
Central banks intervene in the gold market – just like they intervene in many other markets. The reason for their attempts to manage the gold price is simple. By keeping the gold price low, central banks make the dollar look better. With their interventions central banks are trying to make the dollar look worthy of being the world’s reserve currency when in fact it is not.
The gold price is a barometer that measures whether a national currency is being managed well (i.e., no inflation). So by trying to keep the gold price low, central banks artificially make the demand for dollars higher than it would otherwise be. Intervention is also consistent with the statist philosophy of many governments these days, namely, that they will usurp whatever power is needed to try maintaining the status quo that preserves the privileged position politicians enjoy at the expense of taxpayers.
Though central banks do not control the gold market, they can influence gold’s price. Importantly, their influence is diminishing. Central banks have been dishoarding much of the gold in their vaults, so they now hold a relatively small part of the aboveground gold stock. After the Second World War, about 68% of the aboveground gold stock was in the vaults of central banks. It’s now about 10%.
Less gold within their control means that central banks have less influence on its price, which is one of the reasons central banks are no longer the factor they once were. To learn more about central bank involvement in the gold market, you need to know what GATA knows. www.gata.org
Gold has been rising since 2001, and the many problems national currencies are suffering mean gold is headed higher still. How much higher?
No one of course knows because there is never any certainty when it comes to markets. It is not unreasonable to expect that gold will once again command the purchasing power it once did, particularly given the ongoing inflation and debasement of the dollar. One should never underestimate the capacity of central banks to destroy the purchasing power of a currency. In other words, gold is not rising –it still purchases the same amount of crude oil it did 60 years ago. Rather, the dollar is collapsing.
It is prudent to buy gold because of the alarming problems facing the dollar and other national currencies.
The information shared in this page was collected from sources and little bit of my perception over this issue. Kindly pass your comments.