Page 42 - DECO405_MANAGERIAL_ECONOMICS
P. 42
Unit 3: Market Supply and Equilibrium
Notes
Case Study Demand - Supply and Price of Gold
ast month saw more housewives in the jewellery shops than in any month in the
past. There were no big festivals, neither too many marriages. What attracted them
Lwas the fall in the price of gold. That was so the world over.
Gold prices have been falling for nearly a decade now. Last week they had drifted to their
lowest in the past 18 years. The highest price in the world market was reached in 1980
when it touched $850 an ounce, almost three times the present price. Indian buyers did not
experience the full impact because of the restrictions on import of gold. These have been
significantly eliminated and the price behaviour in the domestic market now conforms to
the international price.
The fall in the price of gold has more to do with the change in demand. Gold has many
uses, Jewellery is only of them. It is an industrial metal, a form of saving for the rainy day
and an international reserve asset for most central banks. The lure of gold for ornaments
remains almost in tact. But as a form of saving or as reserve for the central banks, gold is
no longer attractive. It is precisely this loss in trust that has caused the fall in the price of
gold.
Gold has become a bad investment. Anyone would weigh an asset in terms of the return
it earns, the security it gives and the ready market it enjoys. The last is the best with gold.
But with the price going down; investment in gold makes no sense. An investment of
1,000 in gold in India in 1990 would have fetched today 1,120. That gives a yield of less
than 3 per cent. Not worth the game.
The same investment in equity would have matured into 1,900 and in bank deposit
2,200. Gold is no longer a viable investment though the housewife may still buy gold
partly for display and partly from ignorance about the alternative opportunities.
The penchant for jewellery is much more in India and West Asia than in most other
countries. The world demand for jewellery was 2,807 tonnes last year. Gold that was
actually mined was only 1,350 tonnes. The balance came from sales by the central banks.
The bankers are hard-nosed fellows and the new generation bankers even more so. For
their predecessors gold meant total security. That was not without reasons.
Countries had adopted gold standard and issue of currency had to have commensurate
gold backing. The system had continued till the beginning of this century and in a modified
form, even later. The final link with gold was given up in 1972, after the oil crisis, when the
dollar ceased to be convertible into gold. But the gold hangover continued until the new
generation bankers looked at gold only as an income generating asset. It had ceased to be
one.
Over the years, the central banks had piled up huge reserves of gold. These currently
exceed 37,000 tonnes – equivalent to 12 years' supply. When part of this gold began to
come to the market, prices crashed. Netherlands possibly took the lead to empty the
central bank coffers of gold. It sold 300 tonnes in four instalments to cut down its gold
reserves by a fifth. The big shock came when Australia slashed its reserves by two-thirds.
It was a shock because Australia is a major producer of gold.
Argentina came out even more boldly and sold out its entire gold reserve of 124 tonnes
for about $1.5 billion. Had it continued with gold, the central bank would have lost
$1.5 million for every one per cent fall in the price of gold. With the shift from gold to US
treasury bonds which are rated even higher than AAA the central bank would, instead, be
earning an income of $80 a year.
Contd...
LOVELY PROFESSIONAL UNIVERSITY 37