The Wealth Effect of Gold

25 11 2009

Among many contradictions that India is famous for, one is its appetite for gold. In spite of being poor, Indians have always had an almost irrational love for the yellow metal. This obsession seems to be now having a beneficial impact as gold prices touch new highs.

India is one of the largest importers of gold in the world. As per World Gold Council, a total of 158,000 tonnes of gold have been mined till date. Out of this Indians’ private holdings is considered to be the highest at 15,000 tonnes. American citizens’ holdings is a mere 4000 tonnes. Indian government’s gold reserves ranks 10th among all countries at 757.7 tonnes.  

 

The prices of gold in India have increased from Rs 13,520 at the start of the year to Rs 17,300 currently, a gain of 28%, reports Business Line.

 

Domestic prices have merely followed global gold prices, which rose from $827/ounce to $1,139/ounce (a 38 per cent gain) over the same period. Price gains in India have, in fact, not kept up with global trends, mainly because of the rupee strengthening by about 8 per cent against the dollar for the year.

 

The weakness of US $ is considered to be one of the most important factors leading to the rise in  gold prices. 

 

 

Gold prices are expected to go up further in 2010. Some reports suggesting the gold prices will touch US $ 1,400 per oz shortly. As is the case with all asset classes, views of the various analysts differ as this report mentions.

Several bullion analysts like Jim Rogers and Jim Sinclair have predicted that gold price would continue to boom. While Jim Rogers says gold price will zoom to $2000, Jim Sinclair has been arguing that the next stop for the yellow metal price is $1650 per ounce.

 

But not every bullion analyst is bullish on gold, the hottest commodity traded in the world. Legendary investing guru Marc Faber says gold price is rising without any fundamental factors and thus the price of the yellow metal will plunge to $900-$800 levels.

 

The rise in the gold prices, have made the value of private holdings go up from 400 billion US $ to 540 billion US $ an increase of 140 billion US $ in the last one year. India’s GDP is of the order of US $ 1 trillion. The increase in wealth due to the rise in price of gold is a whopping 14 % of India’s GDP. So, whatever damage the economic slowdown  may have done to consumer demand, has been more than made up by the wealth effect due to gold prices. Not dissimilar to the effect of crude oil price increases on Russian and Middle-East economies.

 

If the gold prices continue to rise next year, as is being predicted, then this wealth effect will continue. For every 100 $ increase in price of gold, value of India’s gold holdings goes up by 48 Billion US $. However, if Indians continue their obsession for gold even at high prices, then instead of the wealth effect being favorable for the consumer markets, it may have a negative effect.

 

–  G. Mohan

 

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One response

2 12 2009
anekalopedia

According to MArc Faber- the prices of gold will plunge down, but recently the Indian Government made a huge purcase of Gold from the IMF. WHy will a country make a decision to buy Gold in that huge amounts if the prices are increasing on irrational grounds as faber says? I can understand when an individual is obsessed with gold and buys it but is the Indian Govt also obsessed with gold or have they made the purchase out of a thorough calculation.. Whats ur Take Sir?

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