STOCKYARD STOCKYARD Presents ‘GOLD =BUBBLE TROUBLE???’ The Management discussion
Goldâ€™s spectacular rise continues to draw attention. Here are some facts on yellow metal that you may have missed1,67,652 tonnes is the total gold mined till now. $9.43 trillion is the value of gold mined till now. $0.5 trillion is the value of gold held by Federal Reserve Bank.
52% of all gold extracted is now in the form of jewellery. 18% of all gold is in the central bank reserves of different countries.
HISTORY OF GOLD
Gold coins were first minted in Greek city during 610 B.C. Legal tenders used for trading during 1750-1870 with a fixed rate for converting gold into silver. During 1870-1914, all the countries pegged their silver coins to gold standards of U.K. or U.S.
During the Post World War 2 period, U.S. fixed the price of gold at $35 per ounce under the BRETTON WOODS agreement.
After the termination of the Bretton Woods agreement on august 15th 1971, Dollar became U.S. reserve currency. Known as the â€˜Nixon Shockâ€™
Since then Gold & Dollar are inversely related.
GOLD - DOLLAR RELATIONSHIP
Economic Bubble A financial or economic bubble occurs when the commodity/stock trade at prices that exceed their intrinsic or true values. A stock trading beyond its true value eventually crashes, resulting in the decline of the stock price. Popularly known as the â€˜Bursting of the bubbleâ€™
Some examples of Bubbles are : •Tulip Mania(1673) •The roaring twenties stock market bubble(1922-1929) •The Dot-com Bubble(1995-2000)
GOLD BUBBLE: IS THERE ONE? Gold is in an economic bubble and today is selling in excess of $1,800 per ounce -- far beyond its intrinsic worth. Gold is more than just a commodity and is more complicated than the tulip, housing or dot.com phenomena. Prices of gold will continue to rise because its intrinsic value is still more than its market price.
EXCHANGE TRADED FUNDS • An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks. •An ETF holds assets such as stocks, commodities, or bonds. Most ETFs track an index, such as the S&P 500 or MSCI EAFE. •ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features.
•Gold ETFs invest in gold. Gold exchange-traded funds were among the first commodity ETFs, which have been offered in a number of countries. •The idea of a Gold ETF was first officially conceptualized by Benchmark Asset Management Company Private Ltd in India when they filed a proposal with the SEBI in May 2002. •The first gold exchange-traded fund was Gold Bullion Securities launched on the ASX in 2003.
ADVANTAGES OF GOLD ETFs •One of the biggest advantages of gold ETFs is that investing in gold is much more accessible.
•There are no hassles of storing the gold or risking its stolen. It’s relatively maintenancefree.
SIGNIFICANCE OF ETF ON GOLD BUBBLE â€˘Though the real forces driving the bullion market are demand and supply but the significant contribution has been by the ETFs.
â€˘While investment demand has marginally eclipsed jewellery demand in past downturns, demand from jewellery fabrication down by 5% worldwide alongside of 118% rise in investment demand that includes bullions and ETFs.
•SPDR Gold trust, has pointed out that participation of an ETF has inflated the metals demand and inflated its price. •But another school of thought, Paul Justice, said that if you open up access to any asset that was formerly restricted , large rush of buyers impact the underlying price to some degree. •Investment in traditional small bars and coins is still larger “ounce for ounce” than the ETF investment.
Gold Reserves of Major Holders Spain
Islamic Republic of Iran
Republic of China (Taiwan)
WHY DO PEOPLE INVEST IN GOLD? •Majority of the people invest in gold cause others are doing so. •This is called as the ‘Herding Effect’ •Major players of the market enter into the market when the prices are low and exit at a time when the markets are at high thereby helping form a bubble.
â€˘ Seeing the major players making profits, the small retail investors comes in. â€˘ Soon after the prices began to fall and this is when we say that the price correction took place in gold.
WHY ARE WE SAYING THAT A BUBBLE IS BEING CREATED IN GOLD?
• Taking cues from history:
WHY A BUBBLE? • The last time gold was used for investment, exceeded gold used for jewellery was 1980 — the correction in prices happened. • Negative correlation between value of gold and the value of US dollar. • Leads to the appreciation of the value of gold as the value of USD dips down in the times of inflation. • It happened in 1980’s , in 2000, in 2007 and thanks to the downgrade of credit ratings of US by S&P, it is happening now as well.
WHY A BUBBLE ? â€˘ The unemployment rate:
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WHY A BUBBLE? Whenever the recession occurs, the unemployment rate goes up. At present, the unemployment rate in USA is 9.1% Govt. has to give monetary benefits to the unemployed. USA is a debt driven economy and people/countries aren’t willing to pay them money cause of their skepticism
• • • •
WHY A BUBBLE? As other countries aren’t giving USA the money, what USA does is print the money. This leads to huge flow of USD in the market. As large amount of USD is flowing in the market, this leads to depreciation in the value of USD. And as there is a negative correlation between the value of USD and the price of gold, the value of gold is bound to increase. And that is when we say that people herd for investing in gold, thereby creating a bubble.
WHY A BUBBLE? â€˘ The business confidence factor:
WHY A BUBBLE? • The after effects of 2007 and the recent S&P downgrade (from AAA to AA+) have added to the vows of the US government. • Investor have lost confidence in USA as a safe investment bet, • The FDIs and other forms of investments are not coming in. • The investors have lost faith as USA as an investment option is not giving them the returns they expect. • All these factors lead to drop in the value of USD thereby acting as a major factor for appreciating the value of gold.
WHY A BUBBLE?
WHY A BUBBLE? • Interest benefits reaped by FII and other investors were low. • No major investor opted to go to USA and invest. • This lead to depreciation in the value of USD. • Cause of which, the value of gold appreciated; owing to the inverse correlation between the USD value and gold.
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