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General Awareness topic - Impact of Gold on GDP
Impact of Gold on GDP
In ancient times, India was referred as Golden Bird and in the modern times, She has emerged as the largest consumer of gold in the world. The importance of gold can be understood in the saying all glitters are not gold. Gold is an important participant in Indian culture, traditions and economic policy. Gold has several applications or uses and the main reasons why Indians take to gold are:
Gold is considered an equivalent for liquid cash: Gold is highly liquid and portable as a Security or Asset. It can be converted to cash anytime when an emergency arises and is considered a friend in need.
Gold is considered as Status Symbol: Especially in India gold symbolizes wealth. Often, gold is important constituent of the bridal wealth in the wedding. Indian weddings without gold are unimaginable.
Gold is a very good investment: Gold is an asset which has consistently increased in value and thereby considered as a safe and secure investment. Gold is considered an effective diversifier which helps to reduce portfolio risk.
Gold is considered as a good gift item: Gold is precious and worthy across all cultures and times. The gold jewelry is given as gifts during weddings, festivals and other special occasions.
Gold has great religious significance: Gold is the symbol of the Hindu Goddess Laxmi and considered highly auspicious. Gold is brought or presented on festivals like Dhanteras and Akshaya Tritiya. Toe rings are never made of gold as it represents the goddess of wealth and should not be soiled by touching a human's feet.
Great Ornamental Value: Women of every age and time have always loved wearing gold ornaments. Moreover, Gold Ornaments are never out of fashion. It also may be remembered that Wedding rings are also traditionally made of gold to mark a long lasting relationship.
Great value as Heirloom: Gold jewelry is something which can be passed down from one generation to the other as ancestral property.
Not only in India, but in rest of the world also, gold is also one of the most valuable assets. Like most of the commodities, gold prices are also determined by demand and supply. The global demand for gold has many layers. For the last 5 years, jewelry has consisted of 68% of the overall demand for gold.
The major players for gold jewelry with over 50% of the demand are China, Turkey, and the Middle East. Gold, as gold coins or bars, adds another 20% of the demand where the United States, India, and Europe play a vital role. Industrial demand lead by Japan makes up the last 12%. Mining constitute 59 percent of the global gold supply, net official sales constitute 6 percent and recycled gold provides 35 percent of the global gold supply. But many other factors also play their role in determining the gold prices like dollar prices, crude oil prices, inflation etc.
Even today, despite of US Dollar being acceptable in international trade, gold is still considered the safest option. It is because of this reason gold prices are often affected by the change in Dollar prices. Anyone who follows the gold and currency markets closely will realize that the US$ gold price and the Dollar Index generally trend in opposite directions. The reason that gold and the dollar generally trend in opposite directions is that in one respect gold is just another currency.
As a result, when the dollar weakens on the foreign exchange market over an extended period then the US$ gold price will generally rise during the same period; and when the dollar strengthens over many months the US$ gold price will usually fall. There are, of course, leads and lags and there's no reason to expect that percentage changes in one will be accompanied by equal-and-opposite percentage changes in the other, but when charts of the dollar and gold are compared it quickly becomes apparent that the two have been inversely correlated.
On the contrary, gold prices and crude oil prices tend to rise and fall positively with one another. There are two reasons for this- historically, oil purchases were paid for in gold. Even today, a sizable percentage of oil revenue ends up invested in gold.
As oil prices rise, much of the increased revenue is invested as it is surplus to current needs and much of this surplus is invested in gold or other hard assets. The second reason is that rising oil prices place upward pressure on inflation.
This enhances the appeal of gold because it acts as an inflation hedge. Over the last 50 years or so, gold and oil have generally moved together in terms of price, with a positive price correlation of over 80 percent.
Apart from above factors, gold also provides hedge against inflation and therefore there is a positive relationship between gold price and inflation. During times of economic growth there is an increase in wealth which leads to higher demand for luxury goods like gold. During times of economic recession, gold can be used as an asset that protects against inflation and devaluing paper currencies.
The Reserve Bank of India (RBI) has concluded the purchase of 200 metric tonnes of gold from the International Monetary Fund (IMF), under the IMF’s limited gold sales programme. This was done as part of the Reserve Bank’s foreign exchange reserves management operations. RBI’s decision to shore up its gold reserves needs to be seen in the context of other central banks across the globe increasing their gold reserves.
In fact, the share of gold in India’s total reserves has dwindled over the decade. In March 1994, the share of gold in the total reserves of the country was 20.86%; by the end of June 2009, gold constituted only 3.7% of the total reserves.
The purchase resulted in increasing the share of gold in total assets of RBI to 6percent. RBI’s foreign currency assets consist mainly of sovereign bonds, mainly US treasuries. So, buying more gold had helped the Indian central bank to diversify its assets. RBI’s foreign exchange reserves consist of foreign currency assets, gold, special drawing rights (SDR) which is an international reserve currency floated by International Monetary Fund (IMF) and RBI funds kept with IMF.
India is the largest consumer of gold in the world, consuming around 18 per cent of the total world's production. India has to import around 70 per cent of its total gold consumption, thus imparting a lot of foreign exchange to major gold producing countries. With the development of the stock markets, especially on-line trading systems, urban India is slowly shifting its investment focus from gold to the other avenues of investment such as stocks, bonds, mutual funds etc, but, rural India still has its major investments in the form of gold. Around 65 per cent of the total demand for gold in India is from people involved in agriculture and allied industries which contributes to around 30 per cent of the GDP of the nation.
Thus gold is still as important for Indian economy as it was ever. Gold is also the important source of income for many least developed countries of Africa where countries like Mali, Ghana get majority of foreign exchange from the export of Gold.