1. INTRODUCTION

Gold is a chemical element with the symbol Au and an atomic number of 79. It has

been a highly sought-after precious metal for coinage, jewellery, and other arts since

the beginning of recorded history. The metal occurs as nuggets or grains in rocks, in

veins and in alluvial deposits. Gold is dense, soft, shiny and the most malleable and

ductile pure metal known. Pure gold has a bright yellow colour and lustre traditionally

considered attractive, which it maintains without oxidizing in air or water. Gold is one

of the coinage metals and has served as a symbol of wealth and a store of value

throughout history. Gold standards have provided a basis for monetary policies. It also

has been linked to a variety of symbolisms and ideologies.

A total of 161,000 tonnes of gold have been mined in human history, as of 2009. This

is roughly equivalent to 5.175 billion troy ounces or, in terms of volume, about 8,333

cubic meters.

Chemically, gold is a transition metal and can form trivalent and univalent cations in

solutions. Compared with other metals, pure gold is chemically least reactive, but it is

attacked by aqua regia (a mixture of acids), forming chloroauric acid, but not by the

individual acids, and by alkaline solutions of cyanide. Gold dissolves in mercury,

forming amalgam alloys, but does not react with it. Gold is insoluble in nitric acid,

which dissolves silver and base metals. This property is exploited in the gold refining

technique known as "inquartation and parting". Nitric acid has long been used to

confirm the presence of gold in items, and this is the origin of the colloquial term

"acid test", referring to a gold standard test for genuine value.

Of all the precious metals, gold is the most popular as an investment. Investors

generally buy gold as a hedge or safe haven against any economic, political, social or

currency-based crises. These crises include investment market declines, burgeoning

national debt, currency failure, inflation, war and social unrest. Speculators also buy

gold early in a bull market and aim to sell it before a bear market begins, in an attempt

to gain financially.

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Gold has been used throughout history as a form of payment and has been a relative

standard for currency equivalents specific to economic regions or countries. Many

European countries implemented gold standards in the later part of the 19th century

until these were dismantled in the financial crises involving World War I. After World

War II, the Bretton Woods system pegged the United States dollar to gold at a rate of

US$35 per troy ounce. The system existed until the 1971 Nixon Shock, when the US

unilaterally suspended the direct convertibility of the United States dollar to gold.

Since 1919 the most common benchmark for the price of gold has been the London

gold fixing, a twice-daily telephone meeting of representatives from five bullion-

trading firms of the London bullion market. Furthermore, gold is traded continuously

throughout the world based on the intra-day spot price, derived from over-the-counter

gold-trading markets around the world.

Today, like all investments and commodities, the price of gold is ultimately driven by

supply and demand. Unlike most other commodities, the hoarding and disposal plays

a much bigger role in affecting the price, because most of the gold ever mined still

exists and is potentially able to come on to the market for the right price. At the end of

2006, it was estimated that all the gold ever mined totalled 158,000 tonnes This can

be represented by a cube with an edge length of just 20.2 meters.

At the end of 2004 central banks and official organizations held 19 percent of all

above-ground gold as official gold reserves. Given the huge quantity of gold stored

above-ground compared to the annual production, the price of gold is mainly affected

by changes in sentiment, rather than changes in annual production. According to the

World Gold Council, annual mine production of gold over the last few years has been

close to 2,500 tonnes.[15] About 2,000 tonnes goes into jewellery or industrial/dental

production, and around 500 tonnes goes to retail investors and exchange traded gold

funds. This translates to an annual demand for gold to be 1,000 tonnes in excess over

mine production which has come from central bank sales and other disposal.

Central banks and the International Monetary Fund play an important role in the gold

price. The Washington Agreement on Gold (WAG), which dates from September

1999, limits gold sales by its members (Europe, United States, Japan, Australia, Bank

for International Settlements and the International Monetary Fund) to less than 400

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tonnes a year. European central banks, such as the Bank of England and Swiss

National Bank, have been key sellers of gold over this period. Although central banks

do not generally announce gold purchases in advance, some, such as Russia, have

expressed interest in growing their gold reserves again as of late 2005. In early 2006,

China, which only holds 1.3% of its reserves in gold, announced that it was looking

for ways to improve the returns on its official reserves. Some bulls hope that this

signals that China might reposition more of its holdings into gold in line with other

Central Banks. India has recently purchased over 200 tons of gold which has led to a

surge in prices.

Bank failures

When dollars were fully convertible into gold, both were regarded as money.

However, most people preferred to carry around paper banknotes rather than the

somewhat heavier and less divisible gold coins. If people feared their bank would fail,

a bank run might have been the result. This is what happened in the USA during the

Great Depression of the 1930s, leading President Roosevelt to impose a national

emergency and to outlaw the ownership of gold by US citizens.

Low or negative real interest rates

If the return on bonds, equities and real estate is not adequately compensating for risk

and inflation then the demand for gold and other alternative investments such as

commodities increases. An example of this is the period of Stagflation that occurred

during the 1970s and which led to an economic bubble forming in precious metals.

War, invasion, looting, crisis

In times of national crisis, people fear that their assets may be seized and that the

currency may become worthless. They see gold as a solid asset which will always buy

food or transportation. Thus in times of great uncertainty, particularly when war is

feared, the demand for gold rises.

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2. ECONOMIC OVERVIEW

The Indian economy has continuously recorded high growth rates and has become an

attractive destination for investments, according to Ms Pratibha Patil, the Indian

President. "India's growth offers many opportunities for mutually beneficial

cooperation," added Ms Patil. "Today India is among the most attractive destinations

globally, for investments and business and FDI had increased over the last few years,"

said Ms Patil.

The Indian economy is expected to grow at around 7.5 per cent, according to Dr

Manmohan Singh, the Indian Prime Minister. The PM acknowledged Asia's emerging

economies were "growing well" and were, "in fact, contributing to the recovery of the

world economy".

The overall growth of gross domestic product (GDP) at factor cost at constant prices,

as per Revised Estimates, was 8.5 per cent in 2010-11 representing an increase from

the revised growth of 8 per cent during 2009-10, according to the monthly economic

report released for the month of September 2011 by the Ministry of Finance. Overall

growth in the Index of Industrial Production (IIP) was 4.1 per cent during August

2011.

The eight core Infrastructure industries grew by 3.5 per cent in August 2011 and

during April-August 2011-12, these sectors increased by 5.3 per cent. In addition,

exports and imports in terms of US dollar increased by 44.3 per cent 41.8 per cent

respectively, during August 2011.

Over the next two years India could attract foreign direct investment (FDI) worth US$

80 billion, according to a research report by Morgan Stanley. India has received US$

48 billion FDI in the last two years. Considering the pace of FDI growth in India,

KPMG officials believe that FDI in 2011-12 might cross US$ 35 billion mark.

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The Economic scenario

India has been ranked at the second place in global foreign direct investments

(FDI) in 2010 and is expected to remain among the top five attractive destinations

for international investors during 2010-12, according to a report on world

investment prospects titled, 'World Investment Prospects Survey 2009-2012' by

the United Nations Conference on Trade and Development (UNCTAD).

India's FDI gathered momentum with the inflows growing by 310 % in June 2011

to touch US$ 5.65 billion. It is the highest monthly inflow during the last 11 years.

The total FDI stood at US$ 16.83 billion during January-June 2011, nearly 57 per

cent higher than the US$ 10.74 billion received during the same period last year.

Non-resident Indian (NRI) inflows in the first quarter of 2011-12 has witnessed a

rise of 38 per cent as compared to the same period in 2010-11. NRIs invested US$

1.54 billion in various NRI deposit schemes during April-June 2011.

Private equity (PE) investments in India stood at US$ 6.14 billion in value terms,

while the number of deals increased by 33 per cent to 195, during January-June

2011, according to data compiled by Chennai-based Venture Intelligence. The rise

in the value of the deals so far (June 2011) recorded a growth of 52 per cent, as

compared to US$ 4.04 billion raised during 2010.

India's foreign exchange (Forex) reserves have increased by US$ 1.6 billion to

register US$ 318 billion during the week ended August 19, 2011, according to

data released by the Reserve Bank of India (RBI). The increase in Forex is largely

attributed due to valuation changes.

The Government has approved fund raising worth Rs 60,950 crore (US$ 13.24

billion) by companies through external commercial borrowings (ECB) or foreign

currency convertible bonds (FCCB) for infrastructure projects in the financial

years 2009-2011.

India's merchandise exports have registered an increase of nearly 82 per cent

during July 2011 from a year ago to touch US$ 29.3 billion, according to a release

by the Ministry of Commerce and Industry. Exports during April-July 2011

reached US$ 108.3 billion, up 54 per cent over the same period a year ago,

according to Mr Rahul Khullar, Commerce Secretary. Exports in the referred

period increased on back of demand for engineering and petroleum products,

gems and jewellery and readymade garments.

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3. RESEARCH DESIGN

3.1. Title of the study

“The impact of gold on the Indian economy and its evolution as an investment option”

– A Study

3.2. Need for Study

This study aims at looking into the rise of gold throughout the history and it evolution

to its current status in the Indian economy. This study will also help in establishing

the relation ship between gold prices and the various economic indicators that are

relevant in the current economic scenario. It gives an overview on the investment

scenario concerning gold in its various forms. This report also throws a light on the

gold standard, it rise in the international economy and its eventual fall.

3.3. Objectives

To study the emergence of the gold standards and its decline.

The study the evolution of gold as an investment option.

To study the role of gold in the Indian economy.

To study the relationship between that exists between gold prices and the

various economic indicators.

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3.4. Research Methodology

This is partly a descriptive and partly a causal research study. The research tries to

discover and get an insight into the important and defining characteristics of gold and

its relationships with the various economic parameters.

This research will be conducted mostly with the help of secondary data. This is data

collected from literature review. White papers, news papers, magazines company

websites are the key source of information. Further the so collected data will be

processed with the help statistical tools.

3.5. Literature Review

3.5.1. Mosley, Layna. "Golden Straightjacket or Golden Opportunity? Sovereign

Borrowing in the 19th and Early 20th Centuries"

 Paper presented at the annual meeting of the American Political Science Association,

Boston Marriott Copley Place, Sheraton Boston & Hynes Convention Centre, Boston,

Massachusetts, Aug 28, 2002

Abstract

What incentives did the classical gold standard provide for its maintenance? How did

the benefits of the gold standard help it to be come a central piece of macroeconomic

policy in the pre-World War I era? While the gold standard provided a variety of

benefits to governments and societies, such as monetary restraint and the facilitation

of trade flows, this paper focuses on the impact of the gold standard on sovereign

borrowing. I argue that the classical gold standard regime served as both a constraint

and an opportunity for governments, in a way similar to present-day currency boards,

or to Economic and Monetary Union. Because it required automatic adjustment in

response to balance of payments imbalances, as well as the free flow of capital and

goods, the gold standard privileged external commitments (the maintenance of par

values) over nations? Internal conditions. Governments? monetary policy autonomy

was surrendered in service to the gold standard regime. At the same time, however,

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commitment to the gold standard allowed governments to access international capital

markets at lower rates of interest; gold convertibility appeared to signal sound

government finances, as well as future debt servicing capacity.

3.5.2. Gold exploration and mining scenario in India

Raju k. K.

The Hutti Gold Mines Co. Ltd, Hutti, INDE

Abstract

Gold, the oldest metal known to man, still dominates the world scene. India was

renowned for its gold from time immemorial. Extensive and intensive ancient gold

mining activity, as evidenced by numerous ancient workings, throughout the country

testify the flourishing nature of the gold mining industry in India. Modern gold

mining dates from the year 1870. Gold production in India was not significant when

compared to world standards. At present, Bharat Gold Mines Ltd., and Hutti Gold

Mines Co. Ltd., are the two primary gold producing units in India, and produced

together about 2.5 tonnes of gold during 1995 as against the world's total of 2,272

tonnes. While production has fallen to very low levels in recent years, demand for the

precious metal in domestic market has abnormally increased from 150 tonnes in 1986

to 506 tonnes in 1995 which was mainly met by imports. Indian mine production has

been insignificant and remained static between 1.6 and 2.5 tonnes per annum during

the last 10 years. This was mainly due to the fact that no new gold deposits of

significant size were discovered in the country as the gold exploration and mining

programmes were not aggressive due to the meagre budgetary allocations to these

sectors as they were controlled by the Government. Considering the big gap in ever

increasing demand for gold and the insignificant indigenous supply from the mines,

and the vast geological potential, which was not thoroughly explored and mined,

Government of India liberalised the mineral policy. The repeal of the Gold Control

Order and economic liberalisation have thrown open new vistas for growth of gold

mining in the country. There is ample market potential available in the country for

indigenously produced gold as India is highly deficient in gold production. From the

past history of gold mining and striking similarities in geological environment with

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the leading gold producing countries of the world. India offers a good potential for

gold. The Archaean greenstone belts and the other favourable geological horizons

have to be thoroughly explored systematically by the latest state-of-art technology.

3.5.3. Gold and Gold Stocks as Investments for Institutional Portfolios

Jeffrey F. Jaffe

1989 CFA Institute.

Abstract

While gold is quite risky as an individual asset, its returns are generally independent

of those on other assets. This suggests that gold can play an important role in a

diversified portfolio. Tests of four hypothetical portfolios of varying risk show that

the addition of gold in each case increases average return while reducing standard

deviation. Gold stocks might be expected to be better investment vehicles than gold

itself, because they do not share gold's high liquidity, consumption and convenience

values. A portfolio of gold stocks on the Toronto Stock Exchange and a mutual fund

of South African gold-mining stocks mirror the returns on gold. Adding a

combination of these gold proxies to the hypothetical diversified portfolios raises their

mean returns but also increases their standard deviations. The increase in returns,

however, more than compensates for the increased risk.

3.5.4. Inflation, Tax Rules, And The Prices Of Land And Gold

M. Feldstein

Harvard University and the National Bureau of Economic Research, Cambridge, MA

02138, USA

Abstract

Traditional theory implies that the relative price of consumer goods and of such real

assets as land and gold should not be permanently affected by the rate of inflation. A

change in the general rate of inflation should, in equilibrium, cause an equal change in

the rate of inflation for each asset price. The experience of the past decade has been

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very different from the predictions of this theory: the prices of land, gold, and other

such stores of value have increased by substantially more than the general price level.

The present paper presents a simple theoretical model that explains the positive

relation between the rate of inflation and the relative price of such real assets. More

specifically, in an economy with an income tax, an increase in the expected rate of

inflation causes an immediate increase in the relative price of such ‘store of value’

real assets. The behavior of real asset prices discussed in this paper is thus a further

example of the non-neutral response of capital markets to inflation in an economy

with income taxes.

3.5.5. Market Anticipations of Government Policies and the Price of Gold

Stephen W. Salant and Dale W. Henderson

The Journal of Political Economy, Vol. 86, No. 4 (Aug., 1978), pp. 627-648

Abstract

This paper is an analysis of the effects of anticipations of government sales policies

on the real price of gold. Although the risk of a future government gold auction

depresses the price, it also causes the price to rise in percentage terms faster than the

real rate of interest and at an increasing rate. Even risk-neutral investors require this

rate of return as inducement to hold gold in the face of the asymmetric risk of a price

collapse. Announcements making a government auction more probable cause a

sudden drop in the price. Government attempts to peg the price or to defend a price

ceiling with sales from its stockpile must result eventually in a sudden attack by

speculators.

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4. DATA ANALYSIS

4.1. GOLD STANDARD

The gold standard is a monetary system in which the standard economic unit of

account is a fixed weight of gold. When several nations are using such a fixed unit of

account, the rates of exchange among national currencies effectively become fixed.

The gold standard can also be viewed as a monetary system in which changes in the

supply and demand of gold determine the value of goods and services in relation to

their supply and demand.

Why gold?

Because of its rarity and durability, gold has long been used as a means of payment.

The exact nature of the evolution of money varies significantly across time and place,

though it is believed by historians that gold's high value for its utility, density,

resistance to corrosion, uniformity, and easy divisibility made it useful both as a store

of value and as a unit of account for stored value of other kinds — in Babylon a

bushel of wheat was the unit of account, with a weight in gold used as the token to

transport value. Early monetary systems based on grain used gold to represent the

stored value. Banking began when gold deposited in a bank could be transferred from

one bank account to another by a giro system, or lent at interest.

When used as part of a hard-money system, the function of paper currency is to

reduce the danger of transporting gold, reduce the possibility of debasement of coins,

and avoid the reduction in circulating medium to hoarding and losses. The early

development of paper money was spurred originally by the unreliability of

transportation and the dangers of long voyages, as well as by the desire of

governments to control or regulate the flow of commerce within their dominion.

Money backed by specie is sometimes called representative money, and the notes

issued are often called certificates, to differentiate them from other forms of paper

money.

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Through most of human history, however, silver was the primary circulating medium

and major monetary metal. Gold was the metal which was used as an ultimate store of

value and as means of payment when portability was at a premium, particularly for

payment of armies. Gold would supplant silver as the basic unit of international trade

at various times, including the Islamic golden age, the peak of the Italian trading

states during the Renaissance, and most prominently during the 19th century. Gold

would remain the metal of monetary reserve accounting until the collapse of the

Bretton-Woods agreement in 1972, and remains an important hedge against the

actions of central banks and governments, a means of maintaining general liquidity,

and as a store of value.

Early coinage

The first metal used as a currency was silver, before 2000 BC, when silver ingots

were used in trade, and it was not until 1500 years later that the first coinage of pure

gold was introduced. However, long before this time gold had been the basis of trade

contracts in Akkadia, and later in Egypt. Silver remained the most common monetary

metal used in ordinary transactions through the 19th century.

The Persian Empire collected taxes in gold and, when conquered by Alexander the

Great, this gold became the basis for the gold coinage of his empire. The paying of

mercenaries and armies in gold solidified its importance: gold became synonymous

with paying for military operations, as mentioned by Niccolò Machiavelli in The

Prince two thousand years later. The Roman Empire minted two important gold coins:

aureus, which was approximately 7 grams of gold alloyed with silver, and the smaller

solidus, which weighed 4.4 grams, of which 4.2 was gold. The Roman mints were

fantastically active — the Romans minted, and circulated, millions of coins during the

course of the Republic and the Empire.

After the collapse of the Western Roman Empire and the exhaustion of the gold mines

in Europe, the Byzantine empire continued to mint successor coins to the solidus

called the nomisma or bezant. They were forced to mix more and more base metal

with the gold until, by the turn of the millennium, the coinage in circulation was only

25% gold by weight. This represented a tremendous drop in real value from the old

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95% pure Roman coins. Thus, trade was increasingly conducted via the coinage in use

in the Arabic world, produced from African gold: the dinar.

The dinar and dirham were gold and silver coins, respectively, originally minted by

the Persians. The Caliphates in the Islamic world adopted these coins, but it is with

Caliph Abd al-Malik (685–705) who reformed the currency that the history of the

dinar is usually thought to begin. He removed depictions from coins, established

standard references to Allah on the coins, and fixed ratios of silver to gold. The

growth of Islamic power and trade made the dinar the dominant coin from the

Western coast of Africa to northern India until the late 1200s, and it continued to be

one of the predominant coins for hundreds of years afterwards.

In 1284, the Republic of Venice coined their first solid gold coin, the ducat, which

was to become the standard of European coinage for the next 600 years. Other coins,

the florin, noble, grosh, zloty, and guinea, were also introduced at this time by other

European states to facilitate growing trade. The ducat, because of Venice's pre-

eminent role in trade with the Islamic world and its ability to secure fresh stocks of

gold, would remain the standard against which other coins were measured.

Beginning with the conquest of the Aztec Empire and Inca Empire, Spain had access

to stocks of new gold for coinage in addition to silver. The primary Spanish gold unit

of account was the escudo, and the basic coin the 8 escudos piece, or "doubloon",

which was originally set at 27.4680 grams of 22 carat gold, using current measures,

and was valued at 16 times the equivalent weight of silver. The wide availability of

milled and cob gold coins made it possible for the West Indies to make gold the only

legal tender in 1704. The circulation of Spanish coins would create the unit of account

for the United States, the "dollar" based on the Spanish silver real, and Philadelphia's

currency market would trade in Spanish colonial coins.

Theory

The essential features of the gold standard in theory rest on the idea that inflation is

caused by an increase in the quantity of money, an idea advocated by David Hume,

and that uncertainty over the future purchasing power of money depresses business

confidence and leads to reduced trade and capital investment. The central thesis of the

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gold standard is that removing uncertainty, friction between kinds of currency, and

possible limitations in future trading partners will dramatically benefit an economy,

by expanding both the market for its own goods, the solidity of its credit, and the

markets from which its consumers may purchase goods. In much of gold standard

theory, the benefits of enforcing monetary and fiscal discipline on the government are

central to the benefits obtained, advocates of the gold standard often believe that

governments are almost entirely destructive of economic activity, and that a gold

standard, by reducing their ability to intervene in markets, will increase personal

liberty and economic vitality.

Differing definitions of "gold standard"

If the monetary authority holds sufficient gold to convert all circulating money, then

this is known as a 100% reserve gold standard, or a full gold standard. Some believe

there is no other form of gold standard, since on any "partial" gold standard the value

of circulating representative paper in a free economy will always reflect the faith that

the market has in that note being redeemable for gold. Others, such as some modern

advocates of supply-side economics contest that so long as gold is the accepted unit of

account then it is a true gold standard.

In an internal gold-standard system, gold coins circulate as legal tender or paper

money is freely convertible into gold at a fixed price.

In an international gold-standard system, which may exist in the absence of any

internal gold standard, gold or a currency that is convertible into gold at a fixed price

is used as a means of making international payments. Under such a system, when

exchange rates rise above or fall below the fixed mint rate by more than the cost of

shipping gold from one country to another, large inflows or outflows occur until the

rates return to the official level. International gold standards often limit which entities

have the right to redeem currency for gold. Under the Bretton Woods system, these

were called "SDRs" for Special Drawing Rights.

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4.2. GOLD AS A RESERVE ASSET

Central banks, and official international institutions, have been major holders of gold

for more than 100 years and are expected to retain large stocks in future. They

currently account for about 20% of above-ground stocks. The process of rebalancing

reserve portfolios to adjust to changing conditions has led to a reduction in the amount

of gold held by some central banks recently and this process may continue for some

years to come. But the central banks have affirmed that gold will remain an important

reserve asset for the foreseeable future and it retains an important role in reserve

management.

Central banks started building up their stocks of gold from the 1880s, during the

period of the classical gold standard. Under that system, for countries on the gold

standard, the amount of money in circulation was linked to the country's gold stock,

and paper money was convertible into gold at a fixed price. The development of

banking and credit meant that the amount of money in circulation was greater than the

gold stock itself, but everybody had sufficient confidence in convertibility that there

was no danger of this option actually being exercised. That at least was the case

during the height of the gold standard for the UK, the then dominant economic,

political and financial power. As other countries decided to join the gold standard,

they also started to accumulate gold so as to be able to maintain convertibility at a

fixed price.

The Bank of England, as the central bank at the centre of the system, commanded

such universal confidence that it actually needed very little gold. In 1870, its reserves

were 161 tonnes and by 1913 this had risen to a still moderate figure of 248 tonnes.

Some other countries had by then accumulated much larger stocks: the United States

had 2,293 tonnes, Russia 1,233 tonnes, France 1,030 tonnes, Argentina 440 tonnes,

Germany 439 tonnes, Austria 378 tonnes and Italy 356 tonnes. Even Australia had

more than the UK, at 310 tonnes. The world's total of official gold reserves is

estimated to have been about 8,100 tonnes in 1913, compared with only 700 tonnes in

1870.

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The rise in official gold stocks

The period of economic nationalism between the two world wars saw a rapid

concentration of gold in official hands - up to that point, most gold had always been

held privately, circulating as currency among citizens and across borders in

commercial trade transactions. Gold, which had been the foundation of the first

genuinely international monetary system during the period before World War 1, came

to be used as a weapon in economic competition and national rivalries.

In 1933-34, the United States under President Roosevelt devalued the dollar in terms

of gold, raising the price from $20.67 an ounce to $35 an ounce. This new higher

price caused holders of gold around the world to sell their holdings to the United

States. US official holdings rose from 6,000 tonnes in 1925 to 18,000 tonnes at the

end of World War II, when it had about 60%of all the official stocks of gold.

At their peak in the 1960s, official gold stocks reached about 38,000 tonnes and

probably accounted for about 50% - or perhaps slightly more - of all above ground

stocks. Central banks kept gold because, through the fixed official dollar price of

gold, and dollar convertibility, it was still the foundation of the international monetary

system. Although there was no direct link between gold holdings and national money

supplies (as there had been under the classic gold standard), gold was still the primary

"reserve asset". Central banks could convert dollar balances into gold at the official

price. So gold provided the "anchor" to which all currencies of member countries

were linked, directly or indirectly. But gradually, as central banks created more

money than was consistent with stable prices, and after several years of moderate but

persistent inflation, the fixed official gold price again became unrealistic, and the

United States, as the pivot of the system, was faced with the choice of deflating,

devaluing or abandoning the system. In August 1971, it abandoned the system, with

President Nixon "closing the gold window".

Mobilising gold

As the ultimate form of payment, gold has sometimes proved the only asset, when

used either as cash or as collateral, acceptable to counterparties. Gold can indeed play

a crucial and strategic role in central bank reserve mobilisation in case of need.

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Some examples of where gold has been used in political or economic emergencies

are as follows:

For example, in the 1981 Iranian hostage crisis, Iran refused to accept U.S.

dollars in return for releasing the American hostages it held. So the U.S.

transferred 50 tonnes of gold instead. As then Treasury Assistant Secretary

Manuel Johnson went on to say in Congressional testimony in 1983 - and in

the light of this recent experience - "The Treasury, of course, regards the US

gold stock as part of our national patrimony and of value as a precautionary

asset." The US government simultaneously took ownership of an equivalent

quantity of Iranian gold that had been frozen at the New York Fed, so there

was no net cost to US reserves.

In 1974 Italy secured a $2 billion loan from the Bundesbank with gold as part

of a package (including the then largest ever IMF loan) to shore up its balance

of payments after the 1973 oil price rise.

Hit by a short-run foreign exchange crisis in 1991, India had to rely on its

bullion holdings to survive. First the government swapped 20 tonnes on the

Swiss market and, later, shipped a further 46 tonnes to London as collateral for

a loan from the Bank of Japan. An IMF official at the time noted: "There were

discussions over the weekend about a pool of central banks coming to the

rescue and the first question that was asked by those sponsor banks was

whether they were prepared to give their gold as collateral."

Finally, gold in the private sector can provide a vital support for public sector

purposes. In the aftermath of the 1997 Asian currency crisis several countries

in the region announced plans to mobilise residents' gold holdings - Malaysia,

South Korea and Thailand among them. Only South Korea raised significant

amounts (approximately 270 tonnes) but the avowed intent of all three was to

rely on local citizens' patriotism to surrender gold in return for government

bonds or local currency. The gold collected was either placed directly in

reserves, thereby adding to credibility, or sold for dollars which could be used

to repay external debt or in intervention to support their ailing currencies.

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Tracking central bank gold holdings

Most central banks place data on their reserve assets, including gold, in the public

domain and report them regularly to the IMF, including reports made under the

Standard Data Dissemination Standards. Official holdings are therefore generally

more transparent and easier to track than those of other large holders such as most

major private investors. However, some central banks also hold stocks of gold that are

not considered or reported as formal reserves while some official or quasi-official

institutions have gold holdings that are not reported. In addition holdings may not

always be reported in a way that facilitates analysis. The World Gold Council

compiles a number of statistical tables based on official data in the public domain and

drawn from a variety of sources.

Why central banks hold gold

Monetary authorities have long held gold in their reserves. Today their stocks amount

to some 30,000 tonnes - similar to their holdings 60 years ago. It is sometimes

suggested that maintaining such holdings is inefficient in comparison to foreign

exchange. However, there are good reasons for countries continuing to hold gold as

part of their reserves. These are recognised by central banks themselves although

different central banks would emphasise different factors.

Diversification

In any asset portfolio, it rarely makes sense to have all your eggs in one basket.

Obviously the price of gold can fluctuate - but so too do the exchange and interest

rates of currencies held in reserves. A strategy of reserve diversification will normally

provide a less volatile return than one based on a single asset.

Gold has good diversification properties in a currency portfolio. These stem from the

fact that its value is determined by supply and demand in the world gold markets,

whereas currencies and government securities depend on government promises and

the variations in central banks’ monetary policies. The price of gold therefore behaves

in a completely different way from the prices of currencies or the exchange rates

between currencies.

18

Economic Security

Gold is a unique asset in that it is no one else's liability. Its status cannot therefore be

undermined by inflation in a reserve currency country. Nor is there any risk of the

liability being repudiated.

Gold has maintained its value in terms of real purchasing power in the long run and is

thus particularly suited to form part of central banks' reserves. In contrast, paper

currencies always lose value in the long run and often in the short term as well.

Physical Security

Countries have in the past imposed exchange controls or, at the worst, total asset

freezes. Reserves held in the form of foreign securities are vulnerable to such

measures. Where appropriately located, gold is much less vulnerable. Reserves are for

using when you need to. Total and incontrovertible liquidity is therefore essential.

Gold provides this.

Unexpected needs

If there is one thing of which we can be certain, it is that today’s status quo will not

last for ever. Economic developments both at home and in the rest of the world can

upset countries’ plans, while global shocks can affect the whole international

monetary system.

Owning gold is thus an option against an unknown future. It provides a form of

insurance against some improbable but, if it occurs, highly damaging event. Such

events might include war, an unexpected surge in inflation, a generalised crisis

leading to repudiation of foreign debts by major sovereign borrowers, a regression to

a world of currency or trading blocs or the international isolation of a country.

In emergencies countries may need liquid resources. Gold is liquid and is universally

acceptable as a means of payment. It can also serve as collateral for borrowing.

19

Confidence

The public takes confidence from knowing that its Government holds gold - an

indestructible asset and one not prone to the inflationary worries overhanging paper

money. Some countries give explicit recognition to its support for the domestic

currency. And rating agencies will take comfort from the presence of gold in a

country's reserves.

The IMF's Executive Board, representing the world's governments, has recognised

that the Fund's own holdings of gold give a "fundamental strength" to its balance

sheet. The same applies to gold held on the balance sheet of a central bank.

Income

Gold is sometimes described as a non income-earning asset. This is untrue. There is a

gold lending market and gold can also be traded to generate profits. There may be an

"opportunity cost" of holding gold but, in a world of low interest rates, this is less than

is often thought. The other advantages of gold may well offset any such costs.

Insurance

The opportunity cost of holding gold may be viewed as comparable to an insurance

premium. It is the price deliberately paid to provide protection against a highly

improbable but highly damaging event. Such an event might be war, an unexpected

surge of inflation, a generalised debt crisis involving the repudiation of foreign debts

by major sovereign borrowers, a regression to a world of currency and trading blocs,

or the international isolation of a country.

20

4.3. THE RESERVE BANK OF INDIA

The Reserve Bank is required to hold a fixed amount of gold under the Reserve Bank

of India Act. The original RBI Act (1934) obliged the Reserve Bank to hold 40% of

its assets in gold coin, gold bullion and foreign securities, with not less than Rs. 400

million in value held in gold. The system was later amended, under the Reserve Bank

of India Amendment Act 1956, to the minimum reserve system, that required the bank

to hold at least Rs.1150 million of its assets in gold (this did not imply the need to

acquire additional gold, as the value of existing gold reserves were revised up at the

time). Rs.1150 million equates o just $24.7 million at today’s exchange rate and is

tiny in comparison to India’s total foreign exchange reserves of 151.6 billion. India

mobilised its gold reserves during the 1991 balance of payments crisis. Between May

and July, India shipped a total of 47 tonnes of the country’s gold reserves (the RBI is

allowed to hold up to15% of its total old reserves outside the country) to the Bank of

England as collateral against a $400 million loan and leased a further 20 tonnes of

confiscated gold (not included in the reserve figures)to Union Bank of Switzerland

with a six month buyback option to raise a $200million loan. The funds were used to

help India meet its short-term debt obligations and import bill. The RBI bought back

all 67 tonnes of gold later that year. It also revalued its gold reserves from Rs.28

billion to Rs.72 billion, as it moved from using an outdated gold price4 to valuing its

reserves at close to he international market price. The move vastly improved India’s

reported import coverage ratio. The RBI currently olds 357.7 tonnes of gold, which

though small in comparison to total reserves (4.4% as at September2006), is still he

fifteenth highest of central banks in tonnage terms in the world.

RBI and Its Gold Policy Measures

The Reserve Bank of India (RBI) holds 357.75 tons of gold forming about 6 per cent

of the current value of its total foreign exchange reserves. The evolution of the gold

related policy since independence was centred around some major objectives, viz.,

weaning away people from gold, regulating the supply of gold, reducing the domestic

demand and prices and curbing smuggling.

21

In the wake of the Chinese war, it was felt in some circles that it would be feasible to

make a frontal attack on demand for gold in India. Accordingly, the Gold Control

Order 1962 was issued, banning the making and selling of jewellery above 14 carats,

making it compulsory for gold smiths to be licensed and submit accounts of all gold

received and utilized by them etc., The measures met with lot of resistance and

criticism. This coupled with complexities resulted in the failure of the Gold Control

order.

Bullion imports and exports were also banned but restrictions on import of gold into

the country resulted in the flourishing of smuggling and unofficial transactions in

foreign exchange.

Official imports to discourage smuggling was first mooted in 1977 but viewed against

the forex reserves available then, it was thought as an impossible proposition. The

Government decided to sell confiscated gold in small quantities through the RBI.

However, it did not have any major impact on smuggling.

4.4. ROLE OF GOLD IN INDIAN ECONOMY

India is the world’s largest gold market in volume terms, one that has expanded

considerably during its period of liberalisation. This part of the report provides a

broad overview of the gold market within the context of India’s new super charged

economy. It looks at all the major aspects of demand and supply, including how the

jewellery sector is being affected by the current social and economic changes, new

ways to invest in gold, the role of the Reserve Bank of India and on the supply-side,

mine production and the scrap market.

The origins of gold demand

Indian gold demand is firmly embedded in cultural and religious traditions. The

country has one of the most deeply religious societies in the world, the most

widespread faith being Hinduism, which is practiced by around 80% of the

population. Gold is seen as a symbol of wealth and prosperity in the Hindu religion.

The goddess Lakshmi, who symbolises fertility, productiveness and prosperity, is said

22

to have been bathed by elephants who carried pure water in golden vessels. She is

depicted as a beautiful woman of golden complexion, dressed in gold-embroidered

red clothes, with gold coins flowing from her hands. Since it is suggested that those

who worship her gain wealth, Hindus consider gold an auspicious metal, which they

like to buy or gift during religious festivals. The most important of these is Diwali,

which marks the beginning of the Hindu New Year and usually takes place in October

or November. Akshaya Thrithiya, falling in April or May, has also become an

important day to buy gold. Purchases on this day are considered auspicious (it is the

third most auspicious day in the Hindu calendar). The association between gold and

“auspiciousness” has been used in recent years to promote the idea of buying gold.

Over the past five years, Akshaya Thrithiya has become a major gold-buying occasion

in the South of India, especially in the State of Tamil Nadu, where sales have reached

record levels. Since 2005, the idea has been promoted across the North and West of

the country, which has also resulted in a significant rise in gold sales in these regions.

Gold also plays an important role in the marriage ceremony, where brides are often

adorned from head to toe in gold jewellery. Most of this will be a gift from her parents

as a way of giving her some inheritance, as Hindu tradition dictates that the family’s

assets are only passed down to sons. The gold (and other gifts) the bride receives or

her “Streedhan” (“Stree” meaning woman and “dhan” meaning wealth) mean her

parents can make sure she is financially secure and enjoys at least the same standard

of living to which she was accustomed in her childhood. Gold is especially important

in this respect as it remains directly under her control, whereas she may not be privy

to the family’s other financial affairs. With an estimated 10 million marriages a year

taking place in India, wedding-related demand is big business. Much of this demand

takes place in the wedding season, which falls between October and January, and

April and May, though a good many purchases will be made well in advance of the

wedding. Indeed, it is customary for the parents of a baby girl to start accumulating

gold for this purpose soon after the child is born. Not all gold demand is allied with

cultural and religious beliefs. Gold is also viewed as a secure and easily accessible

savings vehicle by the rural community, where around 70% of the population lives.

Gold has the added virtue of being an inflation hedge.. This is because the Rupee is

not yet fully convertible – Indians are only allowed to hold financial assets in Rupees

– whereas they have been allowed to hold gold since 1990 when the Gold Control Act

was repealed.

23

Recent Economic Trends

The Indian economy has enjoyed rapid growth over the past decade, thanks to the

progressive liberalisation of its economy and the consequent inflow of foreign direct

investment, which has allowed the economy to start reaping the benefits of

globalisation on a truly massive scale. India is now the fifth largest economy in the

world (on a PPP basis) having posted average annual growth rate of 6%p.a for the

past decade. The economy shows no signs of slowing either. A noticeable feature of

India’s development has been the strength of its domestic economy relative to most

emerging markets in Asia. This is particularly true of consumer spending, which has

accounted for the lion’s share of growth over the past decade. The country’s $200

billion retail industry is changing, with the mergence of new large-scale retailing.

Shopping centres are starting to spring up across urban India, something which is

changing theface of retailing and will affect traditional gold retailers. KPMG and the

Federation of Indian Chambers of Commerce and Industry estimate that the amount of

shopping centre space will have risen to90 million square feet by the end of

2007,more than four times the 22 million square feet estimated in 2005.

Gold Demand Trends and Outlook

The past decade can be split into two distinct periods as far as the value of gold sales

is concerned: 1996-2001, when sales were broadly stable in value terms, and 2002-

2005, when sales accelerated strongly. During the first period, spending averaged

Rs.284 billion per annum and fluctuated in a relatively narrow range of Rs.224-316

billion a year. Spending was especially strong in 1998 thanks to the release of pent up

demand following the removal of import controls in November 1997. Gold sales were

broadly stable in the three years that followed, held back by relatively weak income

growth. Sales in tonnage were more volatile over the period, averaging 709 tonnes

and fluctuating between 506-810 tonnes. The higher variability of volume as oppose

to value spending is a function of both the retail price setting mechanism in Indian, as

well as the origins of demand.

24

The price of jewellery changes in line with changes in the international market price

in India, with each item weighed then priced according to the prevailing daily market

rate. The retail mark up is also normally relatively small in relation to the value of the

piece. Still, the value of gold sales is often quite price inelastic, especially where gold

is being used as a long-term savings vehicle. A prime example would be the parents

of a baby girl saving for a future Streedhan, who will usually purchase acertain

monetary value of gold each month, although the volume of gold they can afford each

year will rise and fall with the price.

That Indian demand is not necessarily adversely impacted by rising prices is clear

from the experience of the past few years (2002-2005), when gold demand rose

steadily from Rs.276 billion to Rs.473 billion (or 571 tonnes to 750 tonnes)despite a

coincident rise in the gold price from Rs.15,026 to Rs.19,599. Indeed, a rising price

can often stimulate investment demand for gold, as was the case in Q1 2006, when

retail investment spending surged by 32% year-on-year despite an 11% rise in the

gold price in rupee terms. What does seem to adversely impact on demand is a pick

up in the pace of daily price fluctuations or volatility. Consumers are wary about

purchasing when the price is volatile for fear that they buy and then find the price

falls. This shows the relationship between the average annual 22-day rolling

annualised volatility rate of the rupee denominated gold price and the change in the

value of gold sales: the two show a clear inverse relationship over the sample period

from 1993 to 2005. The same message would seem to come from H1 2006’s

experience, when the value of spending fell by 7%, as gold price volatility spiked

upwards.

The main theme of the past few years has been a solid upswing in gold sales, with

spending increasing from Rs. 276billion in 2002 to Rs. 473 billion in 2005.This has

been underpinned by social and economic changes in the Indian economy– trends that

look set to persist – alongside new and better marketing campaigns from 2004 and a

growing perception that higher gold prices are here to stay. Indians are enjoying a

rapid acceleration in income growth, which is supporting discretionary spending on

consumer goods, including gold. More workers are moving from low income to

middle and high income quartiles, as India continues to attract large volumes of

foreign direct investment, especially into the outsourcing and IT sectors. Last year,

25

estimated 110million households were earning between $10-30K, 16 million

between$30-80K and just short of a 1 million earning over $80K. Global Insight, an

economic forecasting agency, expects the number of people earning between $13-

30K, $30-80K and $80K+to increase by 52%, 87% and 200% in real terms to 167

million, 30 million and 3 million respectively by 2015.Social trends are also

changing. More women are seeking their independence by entering the workforce,

which means there are increasingly two bread winners in the family and there is more

disposable income available for discretionary purchases than in the past. Equally

importantly, young middle class Indians are more willing to spend than their parents’

generation was, while tastes are becoming more international, with households

increasingly demanding all the conveniences of the modern world, such as mobile

phones and home computers.

A recent WGC study, conducted across six key gold markets, including India, found

that the increasing independence of woman in developing countries and shifts in

attitudes and behaviours, combined with a significant increase in their personal

wealth, has meant that gold has become a more relevant and desirable product to a

greater number of women. This has increased the number of women falling into

gold’s core target group in India from 25 million in 2002 to 32 million in 2005 and

contributing to the rise in gold purchases over the past few years. Of course, gold

must compete with a growing desire for other luxury goods too. However, as there is

a much bigger pool of money available, it seems likely that the net impact of these

socio- economic changes will be positive for gold sales, especially with the relevant

marketing initiatives targeted at India’s new affluent young middle class. Recent

experience supports this premise, with the rise in gold sales outstripping the rise in

general retail spending indices. These socio-economic changes have led to enormous

growth in the potential market for gold jewellery.

26

Factors Influencing Demand for Gold Following are the factors influencing the demand for gold.

The increase in the irrigation, technological change in agriculture (through

mechanization and high yielding varieties), have generated large marketable

surplus and a highly skewed rural income distribution is another factors

contributing to additional demand for gold.

Black money originating in the services sector, like real estate and public

sector, has contributed to gold as store of value. Hence income generated in

these service sectors can be treated as a determining variable

Since bank deposits, Mutual funds, small savings, etc are alternative avenues

for investing savings, the weighted return on these alternative assets can be

considered as another influencing factors.

Inflation redistributes incomes in favour of non-wage income earners, leading to more

skewed income distribution. With incremental income of non-wage earners, the

demand for gold as a store of value can be expected to rise.

Ways to buy gold

Traditionally most investment has taken the form of physical gold. In 2005, Indians

bought 102 tonnes of gold coins and bars. But there are new ways toinvest in gold.

Since October 003 the government has allowed futures trading and there are now

three futures exchanges, the two largest being he Multi Commodity Exchange of India

Ltd(MCX) and the National Commodity and Derivatives Exchange Ltd NCDEX).

The next major development is likely to be the arrival of Exchange Traded

Funds(ETFs), expected before he end of 2006.UTI Asset Management Company Ltd

and Benchmark Asset Management Ltd are currently seeking regulatory approval to

sell a gold ETF. These instruments give investors a relatively cost efficient and secure

way to access the gold market. They are listed securities that are backed by allocated

gold held in a vault on behalf of investors and are intended to offer investors a means

of participating in the gold bullion market without the necessity of taking physical

delivery of gold, and to buy and sell that interest through the trading of a security on

regulated stock exchange.

27

Major Markets in India

Mumbai

Mumbai is the major wholesale trading centre in India, price quoting in Mumbai

market is taken as reference price in most other parts of the country. Mumbai was

losing its shine due to high sales tax of 2% prior to April 2002, but the rationalization

of the local taxes in Maharashtra in April 2002 which brought sales tax level to 0.5%

has it helped the gold trade to move back to Mumbai and it would not be a surprise to

see Mumbai to re-emerge as one of the largest gold trading centres in India and

maybe the world. Mumbai and Ahmedabad together account for about 45% Indian

gold trade.

Ahmedabad

The bullion market of Ahmedabad, became the largest landed destination in the

country for the yellow metal after the Gold Control Act was scrapped in 1991-92.The

Gujarat bullion market, which at 280 tonnes accounted for a high 40 per cent of the

entire country's 700-tonne market in 2000-01, had hit a trough in the 2001 fiscal with

volumes crashing by over 50 per cent to less than 140 tonnes. In rupee terms, the

Ahmedabad bullion juggernaut has slowed down perceptibly to Rs6000 crore worth

of business in the last fiscal, a slump from Rs 12,000 crore worth of transaction in the

previous year. However, after the VAT implication in Rajasthan and Gujarat there

should not be major difference in the tax structure. Still Ahmedabad is considered one

of the important bullion markets in the country. The physical delivery in bullion for

the both NCDEX and MCX also generally takes place in Ahmedabad.

Delhi

Delhi is another major gold market in the country. Delhi prices command some

prominence in some parts of the country. Delhi was gaining prominence when

Mumbai was loosing its shine. Delhi Gold market constitutes about 15% of total

Indian gold trade.

28

29

Above ground stocks

Supply from above ground stocks is much more important in India, with the main

source of domestic supply coming from recycled jewellery. Over the past five years,

Indians have recycled an average of 105 tonnes of gold per annum. Scrap supply is

sensitive to general economic conditions, the price of gold and price expectations. The

harp increase inscrap5 in 2002 and 2003 (Figure 10) was driven by a combination of

distress selling in rural areas because of the poor2002 monsoon and subsequent hit to

agricultural incomes, as well as a higher high gold price the gold price

averaged$309.68 in 2002 and $363.32 in 2003,compared with $271-$279 in the

previous three ears). Price expectations also matter. For instance, the decline in scrap

supply in 2005, in the face of high prices and generally good economic conditions, is

attributed to expectations of still higher prices6.In summary, India looks poised to

remain the world’s foremost gold consumer in tonnage terms for many years to come.

Its dynamic population growth and strong cultural and religious affinity to gold will

continue to underpin structural demand. Mean while, rapid income growth, thanks to

the influx of foreign capital, should, in tandem with new successful marketing

campaigns, continue to boost discretionary spending on gold, notwithstanding

temporary fluctuations associated with spikes in price volatility. India’s demand will

continue to be satisfied almost entirely from imports, as aside from the scrap market,

very little supply comes from domestic sources.

Economic Implications of Gold Imports

Gold by it self does not add much to production or productive capacity. However the

foreign exchange used for importing it in effect reduces the availability of this

resource for other imports (including raw materials, intermediates and capital

equipment) needed for current production and to expand productive capacity. In the

Indian context, the magnitude of FOREX expended on gold imports has been large

and growing in 1970, India’s imports at the prices prevailing in the world market at

that time, would have cost $ 2.2 billion, equivalent to about one eighth of

merchandise exports and 8 percent of merchandise imports and the corresponding

figures for 1997 was $ 7.5 billion. (Equivalent to about one fifth of exports and one

sixth of imports).

30

Prior to 1992, gold imports being illegal were financed by the proceeds of under

invoicing of the exports, over invoicing of imports, earning of migrant workers

remitted through hawala channels and smuggling of silver and contra brand drugs.

These transactions did not figure at all in the country’s trade or payment statistics.

After 1992, the value of legal gold imports cleared through the customs are included

as part of merchandise imports in the balance of payments data (but not in the trade

statistics) an equivalent amount being recorded as transfer receipts under invisible.

The nature and sources of the latter are not indicated for lack of information. Clearly

they, as well as the resources needed for the still substantial smuggled gold, must have

been derived from one or the other of the extra legal sources cited earlier. Possibly

their relative importance has changed in effect the hawala market continues to operate

but with indirect legal sanction given by the gold import policy.

The magnitudes involved are large in relation to the size of the country’s foreign trade

and payments: The gold stock of the country at the end of 2000 was close to 14,000

tons valued at current price at $ 165 billion. Their continued rapid growth can have

significant consequences in the terms of scale and functioning of the hawala market,

the availability of FOREX for other purposes and the health of the balance of

payment.

The other characteristics of gold are that it is a highly liquid store of value. It

represents command over both at home and at abroad which can in principle be

invoked whenever necessary. Its physical depreciation is negligible and it can be

readily converted in to cash by sale in the world market by acquiring other resources

both at domestic and international market. Though it does not earn any interest and

though it is no longer used as the standard for fixing currency values, the fact that

there is a very well developed world market for metal and that its prices have until

recently increased much faster than the general price level makes it a attractive asset.

So far Gold is treated as ornament, it can be treated as durable consumer good. But

this function does not in any way dilute its advantage as liquid, risk free asset. In any

case, not all gold is held in the form of ornaments; a large part of it is held in the form

of bars. Altogether from country’s point of view, gold’s holding whether in the form

of bars or ornaments, are no different from FOREX holdings. That the bulk of it is in

the hands of private individuals who may or may not be willing to convert it into other

31

assets is another matter, and does not detract from this feature. Of course, it is

important to such a context, to understand why people prefer to hold gold and the

conditions under which they will add or reduce the stock of it in their hands.

If accumulating gold, in principle, is no different from accumulation of FOREX

reserves or investment in foreign financial assets, then they must be properly counted

as part of the economy’s savings. The more so because investment in gold, in real

sense, a substitute for investment in other assets. It is significant that during the last

five years, the value of additions to gold stock accounts for over 20% of private non-

corporate sector’s investment in financial instruments.

Exclusion of gold from the estimates of domestic savings thus understates the

household and overall domestic savings rate, and this bias has been increasing from

the last two decades.

Tariff Structure

The import duty on Gold was Rs.220 per ten grams upto January 1999,after which it

was increased to Rs400 per ten grams, this led to increased gold smuggling. As a

result, India lost an estimated Rs6000 crores (Rs 60 billion) of foreign exchange.

Smuggling gradually came down when the duty was reduced to Rs250 per ten grams

on April 2001 and subsequently to Rs100 per ten grams. The amount of duty released

from gold imports indicates an annual figure varying from Rs.1000 to Rs.2,000 crore

per annum since 1997.

4.5. GOLD AS AN INVESTMENT INSTRUMENT

Of all the precious metals, gold is the most popular as an investment. Investment

demand can be split broadly into two, private and public-sector holdings. Private

sector holdings come in the form of bars and coins. Unlike jewellery, which is held at

least in part for decorative purposes, these holdings are purely a store of value,

although in the Middle East coins and small bars are often incorporated into jewellery.

Private investment holdings amount to just under 25,000 tonnes, a figure that has been

growing slowly over time. More interestingly the location of the bulk of these

holdings is believed to have shifted. Whereas thirty years ago, a substantial portion of

32

this was held by Western investors, the overwhelming majority is now thought to be

held in other parts of the world. Reasons for holding physical gold vary widely. In

markets with poorly developed financial systems, inaccessible or insecure banks, or

where trust in the government is low, gold is attractive as a store of value which is

portable, anonymous and readily marketable anywhere. In countries with a stable

political and financial system, the prime attraction of gold is as an investment which

has very low or negative, correlation with other assets, and which may hold or

increase its value if for some reason investors flee from purely financial assets like

bonds and equities.

If gold is held primarily as an investment asset, it does not need to be held in physical

form. The investor could hold gold-linked paper assets or could lend out the physical

gold on the market. While proper discussion of the gold lending market is reserved to

the second chapter of the report, suffice to observe here that an investor who wants

exposure to gold, particularly if his position is more than, say, 10,000 ounces, will

normally be able to achieve an increase in return of perhaps 1% by lending out his

gold over the return he would gain by holding physical gold. In addition he will save

on the storage costs.

Current holdings by different countries are quite diverse both in terms of absolute

quantity and as a proportion of their total external reserves. Gold holdings twenty

years ago are a good predictor of a central bank’s holding today. The stability has

been particularly marked among the larger holders - including the United States,

Germany, the International Monetary Fund and France. There have been substantial

sales, most notably by Argentina, Australia, Belgium, Canada, the Netherlands,

Switzerland and the UK. There have also been confirmed buyers, the largest being

Taiwan and Poland. These differences can partly be explained by the way in which

reserves are viewed nationally, and the way in which decisions on reserve policy are

taken, and also by the very large size of reserves relative to the underlying flow of

production and consumption. Given the size of official reserves relative to

consumption levels, the possibility of changes in policy has had a substantial impact

on the gold price.

33

Investment vehicles

Retail Gold Investment

The definition excludes so-called “investment jewellery”. It is decided to only count

physical bullion coins and bars, with these in turn defined by the standard adopted by

the European Union. In counting such bullion, however, private investor metal

account holdings are included. Theoretically in the latter case, there could be a

problem with unallocated as opposed to allocated gold holdings, as the part of the

former would be lent out. Making an allowance for this is, however, impractical.

Finally, the definition of retail investment demand excludes all institutional

investment.

The broadest definition of retail investment would incorporate any private sector

demand for gold that was not related purely to adornment or industrial purposes. This

would include so-called “investment jewellery” (generally high carat, low mark-up

jewellery purchased with an investment motive). The problem with such a definition

is that it is highly subjective as well as excessively elastic. It is subjective because

purchase-motive is extremely difficult to measure on a scientific basis. For example,

wedding-related demand for high-carat jewellery in India has an important investment

motive but it is also purchased for adornment.. In addition, to complicate matters still

further, one is dealing with a dynamic situation. For example, changing tastes in

jewellery and the shift to lower-carat articles in some parts of the world, where high-

carat was formerly predominant, makes it impossible on a systematic and regular

basis to measure “investment jewellery” demand worldwide.

Bars

The most traditional way of investing in gold is by buying bullion gold bars. In some

countries, like Argentina, Austria, Liechtenstein and Switzerland, these can easily be

bought or sold "over the counter" of the major banks. Alternatively, there are bullion

dealers that provide the same service. Bars are available in various sizes, for example

in Europe these would typically be in 12.5kg or 1kg bars (1kg = 32.15072 Troy

ounces), although many other weights exist, such as the Tael, 10oz, 1oz bar, 10g, or 1

34

Tola.

Gold bars can be held either directly (i.e. held directly by you or in your own safe) or

indirectly (held in a safe deposit box or bank vault on your behalf). Because of the

many difficulties of transporting, storing and verifying pure gold bars, an increasingly

popular method of investing in gold bars for the small investor is via allocated

holdings using a gold account - see 'Accounts' below.

Bars are increasing in popularity as investment vehicles, as they carry lower

premiums than gold bullions. It is estimated that the premiums on kilo gold bars can

be at least $50 per ounce less than the premiums on bars such as the American Gold

Eagles.

Gold bars for sale include 1-oz gold bars, 10-oz gold bars, kilo gold bars, and 100-

gram gold bars. All these gold bars are .9999 fine (99.99 pure.). [26] It seems that the

gold bars are primarily sold as kilo bars rather than 1-oz gold bars, due to the fact that

they are much easier to store.

Kilo gold bars are .9999 fine (99.99% pure) and contain 32.15 troy ounces each. The

most commonly available kilo gold bars are the PAMP and the Royal Canadian Mint

(RCM) gold bars. PAMP kilo gold bars usually come with certificates. RCM bars do

not come with either protective cases or certificates. [27] The PAMP certificate actually

consists of the PAMP hallmark on the gold bars.

Coins

Buying gold coins is a popular way of holding gold. Typically bullion coins are priced

according to their weight, plus a premium above the gold spot price. Again, the large

Swiss and Liechtenstein banks buy and sell these coins over the counter.

One of the most popular gold coins is the American Eagle bullion coin, which is

guaranteed by the United States Government and has been in circulation for over 300

years. The American Eagle coins contain a stated amount of pure gold and are made

in four denominations, by the Department of Treasury.

35

The standard gold eagle coins have a fineness of 0.916 and have a face value of $50.

The actual gold content of these coins is 1.0 troy ounce (31.103 grs). These US gold

eagle coins are also minted in ½, ¼ and 1/10 ounce sizes. [28]

Exchange-traded funds

Gold exchange-traded funds (or GETFs) are traded like shares on the major stock

exchanges including London, New York and Sydney. The first gold ETF, Gold

Bullion Securities (ticker symbol "GOLD"), was launched in March 2003 on the

Australian Stock Exchange, and originally represented exactly one-tenth of an ounce

of gold.

Gold ETFs represent an easy way to gain exposure to the gold price, without the

inconvenience of storing physical bars. Typically a small commission is charged for

trading in gold ETFs and a small annual storage fee is charged. The annual expenses

of the fund such as storage, insurance, and management fees are charged by selling a

small amount of gold represented by each certificate, so the amount of gold in each

certificate will gradually decline over time.

Exchange-traded funds, or ETFs, are investment companies that are legally classified

as open-end companies or Unit Investment Trusts (UITs), but that differ from

traditional open-end companies and UITs. The main differences are that ETFs do not

sell directly to investors and they issue their shares in what are called "Creation Units"

(large blocks such as blocks of 50,000 shares). Also, the Creation Units may not be

purchased with cash but a basket of securities that mirrors the ETF's portfolio.

Usually, the Creation Units are split up and re-sold on a secondary market.

Certificates

A certificate of ownership can be held by gold investors, instead of storing the actual

gold bullion. Gold certificates allow investors to buy and sell the security without the

inconvenience associated with the transfer of actual physical gold.

Gold certificates may be described as the first paper bank notes. They were first

issued in the 17th century when they were used by goldsmiths in England and The

36

Netherlands for customers who kept deposits of gold bullion into their safe-keeping.

Two centuries later, the gold certificates began being issued in the United States when

the US Treasury issued such certificates that could be exchanged for gold. The United

States Government first authorized the use of the gold certificates in 1863. In the early

1930s the US Government restricted the private gold ownership in the United States

and therefore, the gold certificates stopped circulating as money. Nowadays, gold

certificates are still issued by gold pool programs in Australia and the United States,

as well as by banks in Germany and Switzerland.

Accounts

Most Swiss banks offer gold accounts where gold can be instantly bought or sold just

like any foreign currency. Digital gold currency accounts and the BullionVault gold

exchange work on a similar principle. Gold accounts are typically backed through

unallocated (fungible or pooled) or allocated (also known as non-fungible) gold

storage. Different accounts impose varying levels of intermediation between the client

and their gold, for example through bailment or within a trust. Bailment is the legal

action of a client entrusting their physical property to another party for safekeeping,

and paying for the service.

Derivatives, CFDs and spread betting

Derivatives, such as gold forwards, futures and options, currently trade on various

exchanges around the world and over-the-counter (OTC) directly in the private

market. In the U.S., gold futures are primarily traded on the New York Commodities

Exchange (COMEX), a division of the New York Mercantile Exchange (NYMEX),

and NYSE Liffe US. In India, gold futures are traded on the National Commodity and

Derivatives Exchange (NCDEX) and Multi Commodity Exchange (MCX).

Firms such as Cantor Index, CMC Markets, IG Index and City Index, all from the

UK, provide contract for difference (CFD) or spread bets on the price of gold.

37

Gold derivatives: basic principles

In its most simplified form, the transaction can be described as follows:

1.Gold is leased by central banks and other holders to commercial/bullion banks and

thus earns for the lender a return in line with the gold lease rate. It is this liquidity

which then allows for the execution of all further derivative transactions.

2. With respect to producer hedging, the bullion banks contract to buy gold forward

from mining companies. To fund the purchase, the bullion banks sell an equivalent

amount of gold borrowed from central banks. The proceeds of this sale are invested

and earn interest at money market rates. Thus under these conditions, the borrowed

gold is sold, which effectively adds to supply in the very short term. In the absence of

compensating factors, this can place pressure on the gold price. This is why hedging

of this nature is sometimes termed “accelerated supply”. In essence it mobilises metal

inventories by bringing this metal into the active market.

3. When the forward sale comes to delivery, the producer delivers either newly-mined

gold or gold purchased in the market to the bullion bank at the contract price. In

theory, the bullion bank then repays its borrowed gold to the central bank and the

transaction is unwound in its entirety. However, more commonly, the central bank

rolls over the loan, thus maintaining the liquidity to fund further derivative

transactions.

4. The transaction in respect to speculative short-selling has an identical effect on the

gold market to that of mining companies (except possibly that mining transactions

typically involve a longer time horizon). In this case the bullion bank, instead of

contracting to buy gold forward from a mining company, contracts to buy gold

forward from a speculator (eg a hedge fund or a bank’s proprietary trading desk). To

fund the transaction it once again sells the gold borrowed from the central bank and

invests the proceeds on the money market.

38

What is special about investing in gold?

Gold is in many ways more like a financial asset than a commodity. Unlike most other

commodities, but like financial assets, gold is bought to be stored or kept rather than

to be consumed. Most of the gold that has ever been produced is still available and

could come back to the market under appropriate conditions. The lending market for

gold is also far more developed than for a typical commodity. The existence of an

active lending market with rather stable and low interest rates is quite typical of

financial assets. In many markets equities can be borrowed at a rate which is only a

small margin above the dividend yield. Liquid bonds can be borrowed at a rate only a

small premium to their running yield. From this perspective it is not surprising that

gold, which pays no dividends or coupons, can be borrowed at a rate close to zero. If

gold were like any other financial asset the evidence in the preceding section suggests

little reason to believe that the derivative market is likely to distort the cash market. In

classic portfolio theory, demand depends not on the price of the asset but on its

expected return. Investors buy an asset if its risk adjusted return is higher than the

market. Demand for individual financial assets tends to be highly elastic. There are

very many different financial assets, most of which are very close substitutes for each

other. Demand for financial assets tends to be measured as a stock – so many billion

dollars – rather than as a flow – so many dollars per year– because investors who

currently hold the asset can and will sell their holdings in their entirety if the expected

return is too low.

All these features of financial assets help ensure that the growth of a derivatives

market is unlikely to have a destabilising effect on prices. Even if the derivatives

market causes investors to rebalance their portfolios, and buy or sell the underlying

asset, large changes in holdings can be accommodated with very little shift in prices.

If gold behaves like a typical financial asset one would expect it too to have a very

elastic price schedule. If a derivatives market does make it easier for producers and

speculators to sell gold short, then a small price reduction would suffice to attract new

investors into the market to take the opposite side of the transaction. But there are

reasons for doubting that the elasticity of demand for gold is so high, or that a

moderate reduction in expected returns on gold would cause most holders to liquidate

their portfolios. The pattern of investors who hold gold is not like that for other

39

financial assets. Most private and institutional investors hold little or no gold.

Investors who hold gold do so at least in part because gold has certain properties

which make it peculiarly attractive in the event of acute political or financial

instability. For these investors, gold is not readily substitutable by other assets. Their

response to changes in expected returns may be relatively small. For example,

someone who holds all their financial wealth in the form of gold will have a cash

demand for gold which may be largely independent of either the price of gold or of

the expected rate of return on holding gold. This means that the price elasticity of

demand is close to unity, since a 10% increase in the gold price will reduce the

volume of gold bought by 10%.Gold is also unlike a financial asset in that there is

substantial consumption demand for gold. While it is hard to separate consumption

and investment motives for purchasing jewellery, it is likely that both the price level

of gold (for consumption) and the expected return on gold (for investment) play a part

in determining demand.

40

4.6. GOLD IN CORRELATION WITH THE ECONOMIC INDICATORS

4.6.1. GOLD V/S INFLATION (CPI)

Inflation is a rise in the general level of prices of goods and services in an economy

over a period of time. When the price level rises, each unit of currency buys fewer

goods and services; consequently, annual inflation is also erosion in the purchasing

power of money – a loss of real value in the internal medium of exchange and unit of

account in the economy. A chief measure of price inflation is the inflation rate, the

annualized percentage change in a general price index (normally the Consumer Price

Index) over time.

Inflation's effects on an economy are manifold and can be simultaneously positive and

negative. Negative effects of inflation include a decrease in the real value of money

and other monetary items over time; uncertainty about future inflation may discourage

investment and saving, or may lead to reductions in investment of productive capital

and increase savings in non-producing assets. e.g. selling stocks and buying gold. This

can reduce overall economic productivity rates, as the capital required to retool

companies becomes more elusive or expensive. High inflation may lead to shortages

of goods if consumers begin hoarding out of concern that prices will increase in the

future. Positive effects include a mitigation of economic recessions, and debt relief by

reducing the real level of debt.

Several leading indicators are monitored by central banks and other agents in the

economy in order to forecast the inflation rate. Variables such as exchange rates,

inventories and durable consumption, to name but a few, are closely monitoredand

scrutinized in order to determine whether the economy is accelerating or decelerating

in order to determine future movements in the rate of inflation. Financial asset prices

have also been found to possess useful leading indicator properties since their rates of

return should embed inflation expectations, but their predictive power has been found

to hold only for some periods, and only for certain countries.

41

A cursory glance at gold’s performance in the years since The Golden Constant was

first published shows an intuitive relationship between changes in the gold price and

changes in the US consumer price index, with peaks in the gold price tending to lead

peaks in the CPI.

4.1. FIGURE SHOWING THE RETURN ON GOLD AND THE CHANGE IN INFLATION

1980-81

1982-83

1984-85

1986-87

1988-89

1990-91

1992-93

1994-95

1996-97

1998-99

2000-01

2002-03

2004-05

2006-07

2008-09

-20.00

-10.00

0.00

10.00

20.00

30.00

40.00

Gold price

change in inflation

The above graph shows the movement of returns on gold and the differential inflation

1981 to 2009. We can visibly infer that the correlation between the gold returns and

the inflation differential is negligible. To get the correlation between the gold and the

inflation the percentage changes were considered compared to the previous year.

The Correlation between the returns on gold and the differential annualised inflation

CPI (with the base year of the year 2000) is 0.106131. Further the calculation of the

regression gave the Beta as 0.037945, indicating that with every one point of change

in the gold price there is a very minimal change in the inflation (CPI) of 0.037945.

Therefore we can safely assume that there is no prominent relationship that exists

between gold and inflation.

42

4.6.3. GOLD V/S IMPORTS

India’s imports, after declining since December 2008 for eleven months, exhibited

reversal in trend in November 2009 with an increase of 2.6 per cent. The uptrend in

imports continued through February 2010. Between December 2009 and February

2010, import growth averaged at 43.0 per cent. Cumulatively, during 2009-10 (April-

February), imports recorded a decline of 13.5 per cent in contrast with a growth of

25.9 per cent a year ago, which resulted from lower international crude oil prices

during the period and slowdown in domestic economic activity. Reflecting the

increase in gold prices and the higher volume of gold imports on account of the

economic recovery, oil imports have increased during the recent period.

The commodity-wise imports during April-September 2009 indicated slowdown in

non-POL imports, which was mainly due to sharp decline in imports of capital goods,

gold and silver, pearls, precious and semi-precious stones, chemicals, iron and steel.

Imports of edible oil and pulses, however, witnessed considerable growth, reflecting

domestic supply constraints and higher prices

4.4. FIGURE SHOWING THE RETURN ON GOLD AND THE CHANGE IN THE IMPORTS OF INDIA

1971-72

1973-74

1975-76

1977-78

1979-80

1981-82

1983-84

1985-86

1987-88

1989-90

1991-92

1993-94

1995-96

1997-98

1999-00

2001-02

2003-04

2005-06

2007-08

-60

-40

-20

0

20

40

60

80

100

120

140

gold pricesImports

0.21502 is the correlation that exists between the returns on gold and the differential

imports of India.

43

4.6.4. GOLD V/S SENSEX

For the premier Stock Exchange that pioneered the stock broking activity in India,

128 years of experience seems to be a proud milestone. A lot has changed since 1875

when 318 persons became members of what today is called "The Stock Exchange,

Mumbai" by paying a princely amount of Re1.Since then, the country's capital

markets have passed through both good and bad periods. The journey in the 20th

century has not been an easy one. Till the decade of eighties, there was no scale to

measure the ups and downs in the Indian stock market.

The Stock Exchange, Mumbai (BSE) in 1986 came out with a stock index that

subsequently became the barometer of the Indian stock market. SENSEX is not only

scientifically designed but also based on globally accepted construction and review

methodology. First compiled in 1986, SENSEX is a basket of 30constituent stocks

representing a sample of large, liquid and representative companies.

The base year of SENSEX is 1978-79 and the base value is 100. The index is widely

reported in both domestic and international markets through print as well as electronic

media. The Index was initially calculated based on the "Full Market Capitalization"

methodology but was shifted to the free-float methodology with effect from

September 1, 2003. The "Free-float Market Capitalization" methodology of index

construction is regarded as an industry best practice globally. All major index

providers like MSCI, FTSE, STOXX, S&P and Dow Jones use the Free-float

methodology.

The growth of equity markets in India has been phenomenal in the decade gone by.

Right from early nineties the stock market witnessed heightened activity in terms of

various bull and bear runs. The SENSEX captured all these events in the most judicial

manner. One can identify the booms and busts of the Indian stock market through

SENSEX

SENSEX is calculated using the "Free-float Market Capitalization" methodology. As

per this methodology, the level of index at any point of time reflects the Free-float

44

market value of 30 component stocks relative to a base period. The market

capitalization of a company is determined by multiplying the price of its stock by the

number of shares issued by the company. This market capitalization is further

multiplied by the free-float factor to determine the free-float market capitalization.

The base period of SENSEX is1978-79 and the base value is 100 index points. This is

often indicated by the notation1978-79=100. The calculation of SENSEX involves

dividing the Free-float market capitalization of 30 companies in the Index by a

number called the Index Divisor. The Divisor is the only link to the original base

period value of the SENSEX. It keeps the Index comparable over time and is the

adjustment point for all Index adjustments arising out of corporate actions,

replacement of scrips etc. During market hours, prices of the index scrips, at which

latest trades are executed, are used by the trading system to calculate SENSEX every

15 seconds and disseminated in real time.

4.5. FIGURE SHOWING THE RETURN ON GOLD AND SENSEX RETURNS

1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

-40

-20

0

20

40

60

80

100

gold pricesannualized sensex

The return on gold correlates to the return on the BSE SENSEX to the extent of

0.178412, which is not a very strong relationship. The regration of the gold returns to

that of the BSE comes up to 0.069205. Therefore it is apparent that the effect of gold

prices in negligible when it comes to the BSE SENSEX.

45

4.6.5. GOLD V/S SILVER

The prices of gold & silver are viewed differently in different market environments.

During the period between 1990- 1998, the price of silver was rising consistently.

This is because in a booming economy where silver has a number of industrial uses,

the commodity was considered to be much more valuable to gold & hence preferred

to gold.

From 1998 through 2008, starting with the Hedge Fund and Asian crises, through the

Y2K scare and the economic collapse of 2000, through the start of the Iraq war, Gold

began to be accumulated more than Silver. Suddenly Gold as money was deemed an

important crisis commodity. As fear replaced confidence, Gold relative to Silver

increased in value, doubling from 40 times silver in 1998, to 80 times silver in 2003 &

60 times silver in 2005. From early 2004 to now, the Gold- Silver ratio varied

between 50 and 70, stabilizing and narrowing towards a mean of 60, which is about

where we are now.

4.6. FIGURE SHOWING THE RETURN ON GOLD AND

1970-71

1972-73

1974-75

1976-77

1978-79

1980-81

1982-83

1984-85

1986-87

1988-89

1990-91

1992-93

1994-95

1996-97

1998-99

2000-01

2002-03

2004-05

2006-07

2008-09

-20

-10

0

10

20

30

40

50

60

70

Gold Mumbai Rupees per 10gms.

Silver Mumbai Rupees per kg.

The price relationship with silver is 0.740537. Here we can clearly see that the

interrelationship between gold and silver is quite strong.

46

5. FINDINGS AND CONCLUSION

5.1. Findings

Gold Standards

The gold standard is a monetary system in which the standard economic unit of

account is a fixed weight of gold.

The essential features of the gold standard in theory rest on the idea that inflation

is caused by an increase in the quantity of money

The gold standard, in theory, limits the power of governments to cause price

inflation by excessive issue of paper currency

Gold as a Reserve Asset Central banks, and official international institutions, have been major holders

of gold for more than 100 years.

Gold can play a crucial and strategic role in central bank reserve mobilisation

in case of need.

The original RBI Act (1934) obliged the Reserve Bank to hold 40% of its

assets in gold coin, gold bullion and foreign securities, with not less than Rs.

400 million in value held in gold.

The Reserve Bank of India (RBI) holds 357.75 tons of gold forming about 6

per cent of the current value of its total foreign exchange reserves.

Role of Gold in Indian Economy India is the world’s largest gold market in volume terms, one that has

expanded considerably during its period of liberalisation.

Sales have averaged 676 tonnes per annum over the past decade

Indian gold demand is firmly embedded in cultural and religious traditions.

Traditionally most investment has taken the form of physical gold.

The main producers of Gold are Hutti Gold Mines and Bharat Gold mines Ltd

47

Gold as an Investment Instrument Gold investment demand can be split broadly into two, private and public-

sector holdings.

Private sector holdings come in the form of bars and coins.

Investment vehicles

o Bars

o Coins

o Certificates

o Exchange-traded funds

o Accounts and

o Derivatives, CFDs and spread betting

Gold V/S Inflation (Cpi) The Correlation between the returns on gold and the differential annualised

inflation CPI (with the base year of the year 2000) is 0.106131.

Gold V/S Imports

0.21502 is the correlation that exists between the returns on gold and the

differential imports of India.\

Gold V/S Sensex The return on gold correlates to the return on the BSE SENSEX to the extent

of 0.178412, which is not a very strong relationship.

The regration of the gold returns to that of the BSE comes up to 0.069205.

Gold V/S Silver

The price relationship with silver is 0.740537. Here we can clearly see that the

interrelationship between gold and silver is quite strong.

48

5.2. Conclusion

Throughout the report we can clearly make out the importance of gold in India. Not

only economical but also culturally. We observed how gold affected the world

economy during the prevalence of the gold standards, its rise to its eventual fall.

By establishing the relationship between the return on gold over a period of years and

the various economic indicators we can come to the conclusion that though gold is

one of the most valuable metal and the most sought after commodity, the gold prices

do not really indicate the course of the economy. The relationship that gold has with

inflation is nothing but a perceptual link that exists only in the minds of the investors

and buyers. The same thing holds true for the relationship between gold returns and

the returns on SENSEX, as gold is perceived as an hedging instrument, investors turn

towards gold when there is a bearish trend.

Through the studies done in tis report we can conclude that the gold price is not the

best of the indicators of the economy, as emotional sentiments play a major role

where gold is considered.

49