GOLD & DOLLAR
“GOLD IS MONEY AND NOTHING ELSE”
•
JP MORGAN
GOLD AS AN INVESTMENT
• Most popular investment
• Brought as a hedge
• Subjected to speculation
• Behaves like a currency
GOLD AND DOLLAR RELATIONSHIP
• One has to remember that gold almost never changes in
value. It is the dollar that revalues in relationship to gold.
• US$ gold price and the Dollar Index generally trend in opposite
directions. This reciprocal relationship between gold and the
dollar evident during longer period.
• As a result, when the dollar weakens on the foreign exchange
market over an extended period then the US$ gold price will
generally rise during the same period; and when the dollar
strengthens over many months the US$ gold price will usually
fall.
GOLD STANDARD
• Gold Standard was the first universally implemented
exchange system
• The gold standard was mainly used from 1875 to 1914
and also during the interwar years
• The government can only print as much money as its
country has in gold
ADVANTAGES OF GOLD
STANDARD
• Gives real value to currency instead of the imaginary
value of currency today
• The government can only print as much money as they
have gold in their vaults
• The gold standard places all nations on equal footing
• The size and health of a country's economy is
dependent upon its supply of gold.
Current Gold Status
• 165000 tonnes of gold mined as of 2009
• Value of $8.8 trillion
• On Aug 23, 2011, gold hit a new all-time high
of $1886.50
• Most of the gold ever mined is still there in some
form or the other
Fall of Gold Standard
WW 1 and The Great Depression
High Expenditure
Money Supply Increased
Devaluation of $
Hyperinflation
Stock Market Crash
Increased Trading Of Currency/ Goods
Rise in Gold Price
People Trade Currency For Gold
Rise Of Interest Rates
Bank Fails, Unemployment Rises
The Bretton Woods System
• World currencies tied to the dollar (Fixed exchange Rates)
• Gold at $35 per ounce
• Value of the dollar increased
• It led to inflation and a large balance of payment deficit in the U.S
• The U.S. started to deflate the dollar in terms of its value in gold.
• In 1971, gold was repriced to $38 per ounce, then again to $42 per ounce in
1973.
• People sold money for gold.
• In 1973, the U.S. government decoupled the value of the dollar from gold
altogether.
• The price of gold quickly shot up to $120 per ounce in the free market.
• By 1973, the United States and other nations agreed to allow exchange rates to
float.
Price of Gold
• Price of gold is driven by supply and demand as well
as speculation
• Mined Gold exists in accessible form, such as bullion
and mass-produced jewellery
• Central banks and the International Monetary Fund
play an important role in the gold price
• At the end of 2004, central banks and official
organizations held 19 percent of all above-ground gold
as official gold reserves
• Reserves as insurance against their clients' money
• During any global crisis, demand for gold increases,
raising gold prices.
Why Invest in Gold?
HEDGE
AGAINST
INFLATION
GOLD PORTFOLIO
DIVERSIFIER
GOLD –
STORE OF
VALUE
GOLD AS A
SAFE HAVEN
GOLD SUPPLY AND
DEMAND
Invest Vehicles
• Traditional way is buying bullion gold bars. banks and
dealers sell bullions in various size and shapes
• Exchange-traded products (ETPs), ETFs, ETNs, and
CEFs are traded like shares on the major stock
exchanges.
• Gold certificates allow investors to avoid risks
associated with transfer and storage of physical
bullion
Break-up of Gold Holdings
Jewellery
52%
Central
Banks
Unaccounted
2%
16%
Industrial
Investment
(bars, coins)
12%
16%
What is reserve currency
International
pricing currency
for products on
global market
Companies
seek foreign
exchange to
pay for goods
or services
To influence
their domestic
exchange rate
Currency held
as a part of
forex reserves
To pay off
international
debt
obligations
Minimizes
exchange rate
risk
Central banks
hold dollars as
reserve to
guarantee against
currency crises
Salient Features of FOREX Market
• Worldwide decentralized financial market for trading currencies
• 36.7% of foreign exchange are traded in UK; USA accounted for 18%
and Japan accounted for 6.2%
• Most liquid financial market in the world
• Forex market is open 24 hours a day 5 days a week
• Traders include large banks, central banks, institutional investors,
currency speculators, corporations, governments, other financial
institutions, and retail investors
• About 70% to 90% of the foreign exchange transactions are speculative
• More than 60% of the world’s reserve currency is held in U.S. Dollars
• Daily turnover was around $4 trillion in April 2010
• four major currency pairs that are mostly traded; the EUR/USD,
USD/JPY, GBP/USD, and USD/CHF.
Foreign Exchange Reserves in
India
FDI/FII
Gold
SDRs
FCA
Foreign Exchange
Reserves
• External aid
Preeconomic • Commercial
reforms
Borrowings
Era
• NRI deposits
Posteconomic
reforms
era
• US Dollar
• Pound Sterling
• EURO
• Japanese yen
Is Dollar the only Powerful currency?
• The euro (EUR):
• far the newest currency traded among the major pairs traded on Forex markets
• used by 16 European Union member countries
• the strongest economies using the new common currency, such as: France, Italy and mainly
Germany
• The pound sterling (GBP)
• a powerful and globally dynamic economy
• The London commodity market plays a fundamental role in the GBP trends, being a reference for
oil and gold trading
• The Japanese yen (JPY)
• strongest and by far the most traded currency in the Asian market.
• economic situation of its main commercial partner, the USA, tends to have a direct influence on the
JPY market
• JPY is a low-yield currency, being the GBP/JPY the most volatile pair traded on Forex
• The Swiss franc (CHF)
• Though Switzerland is a small country, its strong international trade and money influx made CHF
one of the main currencies traded on Forex
• CHF is often preferred by low yield investors
• In times of financial instability, many traders choose the CHF as a safe investment and its trends
can be often compared to those of the gold
• The Canadian Dollar (CAD)
• Most of the Canadian production is exported to the USA
• As of 2007, the Canadian dollar is the 7th most traded currency in the world and 6th in value terms
• The Canadian dollar is considered to be a benchmark currency
Large Gold Reserves of the World
Rank Country Gold (Tonnes) % of Forex
reserves
1
USA
8,133.5
74.7%
2
Germany
3,401.0
71.7%
3
IMF
2,846.7
4
Italy
2,451.8
71.4%
5
France
2,435.4
66.1%
6
China
1,054.1
1.7%
7
Switzerland 1,040.1
16.4%
8
Qatar
950.3
7.1%
9
Russia
775.2
6.7%
10 Japan
765.2
3.0%
11
Netherlands 615.5
59.4%
12
India
614.8
8.1%
Dollar Debt Paradox
• US tried to exert more global influence via debt, US
Treasury debt
• Increase demand for dollars
• Soon, its trade partners held so many dollars that they
feared to create a dollar crisis
• US tried to lock rest of the world into dependence on a
US money system
• Oil shocks - dollars to import oil became national
security policy for most countries
• Countries tried to earn an interest rate by buying safe,
secure US Treasury bonds
• The biggest dollar surplus country today is China
• US is being flooded with cheap Chinese goods
• Top5 countries with which US has trade deficit: China,
Japan, Canada, Mexico and Germany
• Developing Countries have to sometimes devalue their
currencies to pay dollar debt
• The total US debt—public and private—has more than
doubled since 1995 – 34trillion
• Only 11% of the total U.S workforce is in
manufacturing. In 1970, it was 30%
SUMMARY
There are 3.8 billion ounces (1 ounce is
28.35 gms) of gold in the world and the
supply is increasing by 1.75% each year
(the rate is decreasing due to mine
closures), whereas there are 5,300
billion US dollars in the world and the
supply is increasing by 9% each year.
The end result is obvious.