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Gold has been imported in excessive. Despite Govt.'s efforts to reduce the import of Gold, it does not work well enough. This created big stock of Gold in India and lack of buyers/demand created price-fall. - This is also one of the factors that is responsible for weakening of Indian Rupee. Gold imports are paid from Forex reserves. (This happens at EXIM-Export Import Bank) Our Forex reserves are depleting on account of heavy import of Gold. This causes rise in demand of USD which ultimately weakens Indian Rupee. QE(Close down of Quantitative Easing by USA) is not the only reason of weakening of Indian Rupee. Weakening of Indian Rupee is due to multiple factors. - I hope it helped.
Why demand of Gold has decreased ? (The reason due to which gold is loosing it's value) This is a wide concept. I will explain it in simple words citing some understandable examples: 1. Huge imports of Gold. 2. At MCX-SX, some big bullion traders start selling Gold. These traders are market movers. (This is totally Capital market speculation based process. Any commodity may face abrupt selling/buying on account of many complex reasons. ) So, these traders sell Gold in huge quantity adding to the already surplus amount of Gold. No big bullion traders are willing to buy Gold. This creates decrease in demand of Gold leading to decrease in the price of Gold. 3. General public tends to decrease the buying of Gold on account of savings being less due to general price-rise in India. When they don't save much, they don't think to buy Gold. 4. Investment pattern changes.. People tend to invest in assets other than Gold. This creates decline in demand in Gold ultimately contributing to the decline in price. This is not the crucial factor though. --- I hope it helped.
::: Why gold price is decreasing: Main reason is the continuing slump of world-wide economy. To understand this better, we need to go back two years to 2011.
In 2011, many investors world wide were under the opinion that world economy had hit the bottom and expected a revival of global economy and consequent growth in inflation (not the kind of inflation growth which destabilizes the economies, but the kind of inflation growth which is associated with positive growth of economies). That environment and predictions in 2011 created a huge rush in market towards the gold as many investors see gold as the default hedge against the inflation. However, things did not go along the predicted lines.
Due to the continuing slump in global economy, the inflation has fallen down from 4% in 2011 to 2.5% at present. And, currently speculations are high in global market that the global economy is yet to hit the bottom and consequently further reduction in inflation is expected. Thus, all those investors who bought gold in and around 2011, have been busy dislodging it from their portfolios for the last few months leading to one of the largest decrease in gold prices in last two decades.
::: Problem that Indian economy faces with respect to Gold: Global decease in gold prices -- leading to -- increased demand for gold in India -- leading to -- increased gold imports into India -- leading to -- increased trade deficit -- leading to -- increased current account deficit -- leading to several other problems which include rupee depreciation, lowering Forex reserves etc.
::: Govt attempts to curb the demand for Gold: Increased import gold duty from 4% to 6%, and some other instructions to banks requesting to help govt in reducing gold imports. For the time being, the effect of these govt actions seems to be minimal as i) even after considering the 2% increase in import duty, gold is still pretty cheap compared to its prices in recent years (A decrease of almost 15% compared to 2011 prices). ii) Indian's love for gold which means that more layers of buyers keep on adding increasing the market for gold as long as the prices are low. iii) rising inflation in India despite the slump in world economy means, gold in India is still seen as a hedge against inflation.
Yesterday's release that current account deficit between Jan-Mar quarter is 3.6% might do a bit to lift the dampened spirits of Indian economy strengthening the rupee and the economy. And hopefully this makes some buyers to rethink about buying gold, at least the ones who buy it as a hedge against the inflation.
Update: --HDFC stops the facility to buy Gold through credit card. --Reliance Capital terminates all of their Gold schemes --International Gold Price hitting as low as $1200 --Recession can be clearly seen in mines Industry. Gold sales reduces dramatically. ----------- As I said earlier, there are multiple factors (direct or indirect) that influence Gold prices. There is no exact accurate specific answer for this. We can broaden our perception and think about it from various angles and can build our answer.
Thanks for helping me understand this concept. It will be appreciated if you can also tell me the relation between FOMC meting and the gold prices. I read it but did not get it. Many magazines have pointed out that worldwide gold rates are falling due to the latest FOMC meeting chaired by Ben Barnanke which did not give any explicit statement about when the Fed would end its massive quantitative easing (QE) measures.
Federal Open Market Committee (FOMC), a key component of United State's Federal Reserve System (Fed), decides on open market operations of the Fed to control money flow into US market. In the latest FOMC meeting, Fed chairman Ben Bernanke gave indications that in light of consistent positive signals of growth from US economy, Fed might roll back the ongoing stimulus operations in near future. He did not explicitly mention it, but there were feelers.
Rolling back stimulus -- means -- tightening money policy -- means -- increasing interest rates (in US)-- means -- decrease in inflation (in US). Given the size of US' economy, this change in policy might have significant effect on global inflation too. For example, in light of increased interest rates in US, many US investors might take back money from emerging economies and rather invest that in the US itself. This would decrease the money flow in emerging economies and consequently lower the inflation in those economies. Thus, there is a speculation that US policy change might bring down global inflation a bit too. Given this situation, all those who have been holding gold as a hedge to inflation are rushing to dislodge it from their portfolios lowering it's price.
(Small correction in my last post: import duty on gold increased from 4% to 6% in Jan 2013 and 6% to 8% in Jun 2013.)
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Comments
Gold has been imported in excessive.
Despite Govt.'s efforts to reduce the import of Gold, it does not work well enough.
This created big stock of Gold in India and lack of buyers/demand created price-fall.
-
This is also one of the factors that is responsible for weakening of Indian Rupee.
Gold imports are paid from Forex reserves. (This happens at EXIM-Export Import Bank) Our Forex reserves are depleting on account of heavy import of Gold. This causes rise in demand of USD which ultimately weakens Indian Rupee. QE(Close down of Quantitative Easing by USA) is not the only reason of weakening of Indian Rupee.
Weakening of Indian Rupee is due to multiple factors.
-
I hope it helped.
Why demand of Gold has decreased ? (The reason due to which gold is loosing it's value)
This is a wide concept. I will explain it in simple words citing some understandable examples:
1. Huge imports of Gold.
2. At MCX-SX, some big bullion traders start selling Gold. These traders are market movers. (This is totally Capital market speculation based process. Any commodity may face abrupt selling/buying on account of many complex reasons. )
So, these traders sell Gold in huge quantity adding to the already surplus amount of Gold. No big bullion traders are willing to buy Gold. This creates decrease in demand of Gold leading to decrease in the price of Gold.
3. General public tends to decrease the buying of Gold on account of savings being less due to general price-rise in India. When they don't save much, they don't think to buy Gold.
4. Investment pattern changes.. People tend to invest in assets other than Gold. This creates decline in demand in Gold ultimately contributing to the decline in price. This is not the crucial factor though.
---
I hope it helped.
Regards,
Sheen.
::: Why gold price is decreasing:
Main reason is the continuing slump of world-wide economy. To understand this better, we need to go back two years to 2011.
In 2011, many investors world wide were under the opinion that world economy had hit the bottom and expected a revival of global economy and consequent growth in inflation (not the kind of inflation growth which destabilizes the economies, but the kind of inflation growth which is associated with positive growth of economies). That environment and predictions in 2011 created a huge rush in market towards the gold as many investors see gold as the default hedge against the inflation. However, things did not go along the predicted lines.
Due to the continuing slump in global economy, the inflation has fallen down from 4% in 2011 to 2.5% at present. And, currently speculations are high in global market that the global economy is yet to hit the bottom and consequently further reduction in inflation is expected. Thus, all those investors who bought gold in and around 2011, have been busy dislodging it from their portfolios for the last few months leading to one of the largest decrease in gold prices in last two decades.
::: Problem that Indian economy faces with respect to Gold:
Global decease in gold prices -- leading to -- increased demand for gold in India -- leading to -- increased gold imports into India -- leading to -- increased trade deficit -- leading to -- increased current account deficit -- leading to several other problems which include rupee depreciation, lowering Forex reserves etc.
::: Govt attempts to curb the demand for Gold:
Increased import gold duty from 4% to 6%, and some other instructions to banks requesting to help govt in reducing gold imports. For the time being, the effect of these govt actions seems to be minimal as i) even after considering the 2% increase in import duty, gold is still pretty cheap compared to its prices in recent years (A decrease of almost 15% compared to 2011 prices). ii) Indian's love for gold which means that more layers of buyers keep on adding increasing the market for gold as long as the prices are low. iii) rising inflation in India despite the slump in world economy means, gold in India is still seen as a hedge against inflation.
Yesterday's release that current account deficit between Jan-Mar quarter is 3.6% might do a bit to lift the dampened spirits of Indian economy strengthening the rupee and the economy. And hopefully this makes some buyers to rethink about buying gold, at least the ones who buy it as a hedge against the inflation.
Update:
--HDFC stops the facility to buy Gold through credit card.
--Reliance Capital terminates all of their Gold schemes
--International Gold Price hitting as low as $1200
--Recession can be clearly seen in mines Industry. Gold sales reduces dramatically.
-----------
As I said earlier, there are multiple factors (direct or indirect) that influence Gold prices.
There is no exact accurate specific answer for this.
We can broaden our perception and think about it from various angles and can build our answer.
@ram
Thanks for helping me understand this concept. It will be appreciated if you can also tell me the relation between FOMC meting and the gold prices. I read it but did not get it. Many magazines have pointed out that worldwide gold rates are falling due to the latest FOMC meeting chaired by Ben Barnanke which did not give any explicit statement about when the Fed would end its massive quantitative easing (QE) measures.
::: Relation between FOMC meeting and Gold prices
Federal Open Market Committee (FOMC), a key component of United State's Federal Reserve System (Fed), decides on open market operations of the Fed to control money flow into US market. In the latest FOMC meeting, Fed chairman Ben Bernanke gave indications that in light of consistent positive signals of growth from US economy, Fed might roll back the ongoing stimulus operations in near future. He did not explicitly mention it, but there were feelers.
Rolling back stimulus -- means -- tightening money policy -- means -- increasing interest rates (in US)-- means -- decrease in inflation (in US). Given the size of US' economy, this change in policy might have significant effect on global inflation too. For example, in light of increased interest rates in US, many US investors might take back money from emerging economies and rather invest that in the US itself. This would decrease the money flow in emerging economies and consequently lower the inflation in those economies. Thus, there is a speculation that US policy change might bring down global inflation a bit too. Given this situation, all those who have been holding gold as a hedge to inflation are rushing to dislodge it from their portfolios lowering it's price.
(Small correction in my last post: import duty on gold increased from 4% to 6% in Jan 2013 and 6% to 8% in Jun 2013.)