Precious metal and the economy!!!

Gold has always had an impact on the world’s economy and in context of the Indian economy, it is one of the most important deriving force of economy. In the recent times Indian economy is facing a high fiasco in terms of maintaining its balance of payments. Reportedly around 95% of the requirement of gold is imported , in the month of May this year alone 162 tonnes of gold was reported to have been imported. Due to heavy import demands of gold and effect on balance of payments, rupee has lostheavily against the dollar and is now pegged around 58 to 59 to a dollar.

When it comes to demand, India holds only 9% of gold as its reserve yet demand is higher than China by 37%. The scenario of tumbling economy has relations with the selling off gold by the Cyprus which is seemed to be bailout soon. Accordingly, the highest reserve of gold in forex is possessed by USA with 77%, then Germany with 74%. European countries have been supporting the economy with their upper hand in the Gold reserves and International bodies for economic and banking reforms are providing all possible aides so that the economy does not have to face a crisis.

Gold has traditionally been considered an ideal form of security against financial emergencies. The stock market see-saws frequently causing enormous losses to investors, investing in real estate is full of risks and hassels and returns on deposits don’t beat the prevailing inflation rate. Investment in gold, however, is not only risk-free but also hassle-free. It can be bought right off the bazaar. Middle and upper classes, therefore, load their daughters with gold while marrying them off. The demand for gold for this purpose is born out of age-old tradition and has, of late, been effectively stoked by the daily TV soaps where women of the house are shown all the time loaded with gold ornaments from head to foot.

Gold, therefore, is something which is precious and continues to be chased by the rich or poor and by the corrupt. Its demand is highly unlikely to wane at any time soon unless restrictions are placed directly or indirectly for its acquisition. The Indian government had recently tried to curb its demand by increasing the import tax on it from 4 to 6%.

Gold has historically outperformed in the second half of the year. Bloomberg recently reported that even in gold’s bear market between 1980 and 2001 gold gains averaged 1.3% in the second half of the year. While 1.3% doesn’t compare to gold’s double digit percentage increases of the past decade, gold needs all the help it can get as it heads for its first annual loss in 13 years.

Precious metal and the economy!!!