Is Gold Standard on its Way Back?

Business Economics & Services Team (BEST)

                    Is Gold Standard on its Way Back?

How many wars are fought for gold? How many people would have capriciously held gold thinking that it added to their wealth? How many stories would have spun around gold? How many women would have cried and envied for gold on seeing gold in other women’s body or ornament box? How many times gold would have been sold ever since it was mined out from mother earth? How much gold would have been destroyed ever since it was reckoned as a precious metal?  I will not be able to quantify any one of these posers except the last one. Why because I do think gold is a indestructible metal. If it is lost in one form, it comes in another. 

If it is lost in the sea because of  ship wreck by now it might have been swept on to the sea shore more shining since the existence limbo in the womb of the sea would have made the metal more precious and glittering. It might have been  buried there untouched by human hand. Those gold which is still buried, be it in sea or in war chests underneath mother earth  to make them undetected from the enemies or robbers are  still there awaiting a farmer’s pick axe to plough it out of  the deep slumber it is undergoing.

When Times of India today reported that three gold financing companies in Kerala hold more gold in the custody than total reserves of  a few countries including Switzerland, many would not have surprised. But that is only the quantum of gold in their safe vaults pledged by the people in distress. (Gold pledging is a taboo among many in India since it signifies that the person or family  have fallen into bad times). The quantum of gold under the safe custody of the three companies is over 1000 tons. Going by that, the total gold with the Keralities alone  will amount to 100 times more than that if one goes by a conservative estimate. Kerala is only a tiny state and the mean income of the people, to my understanding, will be lower than most of the other states, where there is a huge difference between the incomes of the rich and poor or let us put it in this way-gold with the rich and poor. If you put together, all these gold stocks together, I have a lurking feeling that the total quantum of gold in India, will be matching that of the For Knox’s reserves or anything closer to that.

Why Gold Precious?  Everyone, cutting across geographies and cultures believes that gold is valuable. What gives it value: its golden shine, imperishability or scarcity? May be a judicious combination of these factors could have catapulted the yellow metal to its prime of position.  Over time, it became a means of payment for the reason that it concentrates the highest value in a limited space.

It was US President Nixon in 1971, who put the gold into the back burner. His decision widely referred as “Nixon Shock” delinked gold from dollar.  Until then, dollar banknotes could be redeemed in gold, at an official exchange rate of $35 per ounce. Without the link to gold, the Federal Reserve could now print and lend as much money as it pleased. Since then, the gold in Fort Knox shrank to less than 1% of the value of the currency in circulation. But elsewhere gold demand picked up. Use of gold in medicine, telecommunication and computer industry has increased in the recent days. Unlike in petrol, there is no cartel operating in the case of gold, where a few producers decide the price and what quantity to be produced. We can reasonably be sure that value of gold will continue to be high and the prices do not drop unlike in the case of petrol. Experts are of the view that petrol prices may be dropped below US$ 45 per barrel from a meaty price of US$ 120 or so sometime back.

Will there be a spurt in gold production? Opinions vary. Some feel that the gold mining will be dropped down considerably on account of the higher cost of production and  hazards involved in mining them out. When gold prices drop, it may not be economical to mine them out. That will lead to a  steady decline in production. Since most of the gold is used for either reserves, security  and as ornaments, the price increase may force people to liquidate their gold holdings to some other assets. There is also another argument that sometime down the line gold will be mined from other planets like Mars, Moon, Jupiter etc. where there could be higher deposits of gold and other minerals. Admittedly, there is a section of astrophysicists who believe that minerals are particles that have been brought by meteorites.  When they colluded with the earth millions of years ago, those particles remained with us hidden below the surface.

     

Will there be a return of gold standards? Many think so and too with sound reasons. Governments have been printing paper  money recklessly. This has had two important adverse impacts. One, inflation has been a part and parcel of  every economy. Two, fiscal deficit created by most of the economies thanks to easy rules for printing money is creating havoc to most of the economies. In the past ten years the money supply in the world has more than  trebled, while the economies have shrunk. Different forms of credit creation by banks had swelled the economies and people have lost faith in the intrinsic of value of currency. Self-imposed codes for restraining money creation have fallen flat on several economies.

Against these backdrops, many sincerely feel and hope that the gold standard should be brought back to lend a value to the currency you tuck it in your pocket or wallet. Will it  happen soon is the trillion dollar question?

Read More