Page 43 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes The real gold hoarders are the Swiss bankers. They are conservative and gold is the most
prized asset for them. However, last October, a panel of experts suggested that the banks
sell out a half of their reserves in gold. The report of the panel created big waves. The fear
that the central banks will unload their stocks of gold caused panic. Gold prices crashed.
The fall was the highest in any single day.
It is not just the mismatch between demand and supply that forced prices to drop so
sharply. Gold is a favourite with speculators. Even banks have been indulging in this
lucrative activity. Quite a few American banks sold gold short in anticipation of the fall in
price and earned a good packet. Speculation has made prices more volatile than what they
would have been. Considering the oversupply position, it is the bears that hold the sway.
Will gold prices recover? If they do gold would be a good investment. But they won't. The
demand for gold will now be almost exclusively for jewellery and, to a minor extent, for
industrial use. Even that demand is dwindling because gold does not have a good resale
value and has nearly ceased to be a status symbol for the rich. When most people understand
this the demand for gold, even for jewellery, purposes will shrink.
For the present, it may freeze at around 2,500 tonnes. There is no demand at all from the
bankers for reserves or for investment. The supply will be from the mines from which
2,300 tonnes are dug out every year. On top of that there will be sale by the central banks.
Even if 2 per cent of the world reserves are disposed off, nearly 700 tonnes of additional
supply will enter the market. Again a mismatch between demand and supply is likely
which will prevent prices from firming up.
Gold has little future. By and by even its use for ornaments will die out. A bad investment
and no longer kept for reserve, gold will be on par with other metals. The switch will be
from gold to US treasury bonds for the banks and from gold to equity for the general
public. In India, gold will survive a little longer until the public is acquainted with alternative
investment opportunities. Eventually, gold is bound to lose its lustre.
Table 1: World Gold Supply and Demand

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
Mine 1908 2063 2133 2159 2234 2287 2278 2273 2257 2464
production
Official sector - 434 198 111 622 464 81 173 275 406
sales
Old gold 394 393 530 480 487 574 615 623 640 611
Scrap
Gold Loans 164 78 5 - - - - - - -
Forward sales 126 115 222 96 156 215 158 466 30 329
Option 63 - 7 15 103 - 57 92 101 18
hedging
Implied 91 2 - 304 - - 173 - 108 260
disinvestment
Total supply 2746 3085 3095 3166 3602 3541 3362 3627 3510 4254
fabrication
Jewellery 1645 2039 2188 2358 2760 2553 2615 2790 2837 3328
Electronics 207 209 216 205 176 180 191 206 211 237
Official coil 130 141 123 143 93 117 80 84 63 99
(sales)
Others 147 152 156 162 178 187 194 210 212 226
Contd...
Total 2130 2541 2683 2868 3208 3037 3079 3280 3322 3890
fabrication
Bar Hoarding 461 530 224 252 282 162 231 306 182 337
38 Official sector 155 - - - - - - - -
LOVELY PROFESSIONAL UNIVERSITY -
purchases
Gold loans - - - 45 85 65 52 23 5 28
Forward sales - - - - - - - - - -
Option - 15 - - - 35 - - - -
hedging
Implied - - 188 - 27 242 - 17 - -
investment
Total demand 2746 3085 3095 3166 3602 3541 3362 3627 3510 4254
Gold Price 436.87 380.79 383.59 362.26 343.95 359.82 384.15 384.05 387.87 331.29
(PM fix,$/oz)