Sunday, 7 July 2013

Future of gold: Is lust for gold falling?

Future of gold: Is lust for gold falling?

It is historically proven that gold is a safe investment. However, in recent times, gold has become an insecure asset as its price is rapidly falling. Paul Craig Roberts, former US assistant treasury secretary, said that selling tones of gold by Federal Reserve is a concerted effort to scare people away from gold and get them to buy dollars instead.

Now..., investments in gold have been caught between the devil and the deep blue sea because if investors do not sale gold then they will suffer from losses because of further drop in price and if they sale at present lower prices then they may loss the benefit of future rise in price.

Over a decade, a great increase in gold price from $272 an ounce at the end of December 2000 to $1970 on August 23, 2011 panicked the Federal Reserve because the US dollar was losing its value in relation to gold.
Now, it is predicted that gold prices are likely to move much lower, toward $1,000 by 2015.

Why is gold price falling? Some theories are as follows: First, gold prices tend to spike when there are serious economic, financial and geopolitical risks in the global economy. Now the peak of financial crises has gone.

Second, gold performs best when there is a risk of high inflation, as its popularity as a store of value increases. But despite very aggressive monetary policy by many central banks global inflation is actually low and falling further.

Third, gold is not a direct source of income. While equities have dividends, bonds have coupons, and homes provide rents. Now that the global economy is recovering, non-gold assets provide higher returns.

Fourth, gold prices increase in response to expansionary monetary policy that causes a fall in real interest. This is in effect the time to buy gold when real interest is negative and returns on cash and bonds are negative and falling. However, over time, US and other countries will exist from expansionary monetary policies.

Fifth, highly indebted government such as Cyprus and Italy are going towards gold sale. Nevertheless, it is opposite to the theory because in highly indebted governments, bonds are insecure while gold is secure.

However, if we look from the side of consumers then situation is different. India is the largest buyer of the gold and according to some estimates, India will increase 20% demand for gold this year. The India will be followed by China. It is also argued that central bank of emerging economies will increase the demand of gold.

Right now supply side is bringing down gold price and demand side is not enough strong that it can halt falling prices.

What will happen in future?

Hitting the worldwide gold prices is a well-calculated strategy. If we look from the developed nations point of view then it can go to a point which is difficult to return back. However, if we look from developing countries point of view then increasing demand will absorb price fall in near future.

Once again, it is the time for wide income distributional consequences. Who will be rich and who will be poor? It is difficult to say. In my view, those who will take lead will benefit from artificial prices and who will follow perhaps sufferer from this whole scenario

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