Why Gold Prices are rising?

The reason why the gold prices are galloping

By Dr Bharat Jhunjhunwala


The global investors are today looking for an alternative storehouse to keep their wealth. They want to exit the Dollar, Euro and Yen. This alternative storehouse they are finding in Gold. Thus, the price of gold is likely to increase more in the near future.


It will be plainly understood by the reader that the value of the paper, on which a 1,000-rupeenote is printed or the paper on which a cheque of Rs. 1 crore is written, is scarcely 1 paisa. Or, the value of the paper, on which a property valued at Rs. 10 crore is registered, may only be a few lakh rupees. The value of these papers arises from the backing of the matter written thereon. The 1,000-rupee note is valuable because the Reserve Bank of India guarantees to redeemit. A cheque is valuable because the bank is ready to honour it. The document of a property is valuable because the police are committed to restore possession of the owner. It will be clear from the foregoing that value of a currency arises from the ability of the central bank to back it with real assets.

The American dollar was backed by the US government in this manner after the Second World War.The American Federal Reserve Bank guaranteed that it would provide an ounce of gold for $35 to anyone who demanded this. In this situation it was profitable for people to keep their wealth in form of dollars instead of in gold. They could deposit the dollars in a bank and earn interest on it. They could withdraw the dollars from the bank and convert them into gold whenever they wanted. Keeping wealth in form of gold did not earn interest. This was the reason that the dollar acquired the status of the “world currency”.

The situation changed dramatically in 1971. Oil-producing countries of West Asia formed a cartel by the name of OPEC and raised the price of oil overnight from about $1-2 a barrel to $11. Subsequently, they raised it to about $21 a barrel. The American economy started feeling the pressure of expensive oil. People were worried whether the Federal Reserve Bank would be able to honour its guarantee of exchanging $35 into an ounce of gold. There was a run on the dollar. This forced the Federal Reserve Bank to withdraw the guarantee. The gold standard was abandoned. The dollar was no longer freely convertible into gold. This was the beginning of the end of dollar supremacy. The writ of the dollar continued, however, because the United States accounted for more than one-third of the global economy at that time.

The US economy began to crumble in the nineties in large measure due to the wars in Iraq and Afghanistan. The American government did not have the money to wage these wars. American people also did not have the income to consume goods produced by rest of the world. America adopted Charvaka’s dictum: “Borrow and Drink Ghee”. The Federal Reserve Bank sold US Treasury Bonds in large quantities to raise moneys for the wars and for consumption by the American people.

Coincidentally, China was seeking modern technologies at the same time. China invited American multinationals to come with frontline technologies and establish manufacturing facilities in China to produce goods for exports to their home countryChina provided these multinationals with cheap labour having virtually no protection of labour laws andcheap electricity and minerals. The multinationals exploited these cheap resources and exported goods to America. The problem was that America did not have the money to pay for these imported goods. China stepped in and started buying US Treasury Bonds. China provided the money to America to buy Chinese goods much like automobile companies provide loans to buyers. America sold US Government Treasury Bonds and bought goods from China and waged wars on Iraq and Afghanistan. In the last decade, this led to China accumulating US Treasuries to the tune of$1,400 billion. This accumulation of US Treasuries was okay as long as the US economy was strong.

There were limits to this policy of borrowing for consumption, however. Last two years have seen this truth dawning upon global investors including China that the US was living beyond its means. Most expect the dollar to decline further. Investors stopped investing in dollar-denominated assets. The extent of decline of the US economy can be gauged from the fact that the price of Gold has increased from $35 to $1,000 an ounce between 1971 and 2009.

This decline of the US economy is not clearly visible today. The dollar has risen against the rupee, for example. Four years ago, the price of a dollar was Rs. 40 as against Rs. 48 today. But this is deceptive for two reasons. One, the Indian rupee has decline parallel to the dollar because the Indian government has been as profligate as the American government. Both are declining as two persons holding each other drown in the river together. Secondly, American companies have brought back investments made by them in foreign countries after the crisis has struck at home. This inflow of dollars is temporarily pushing up the value of dollar against other currencies. The rise in dollar against the rupee, therefore, does not cancel the long-term decline in the dollar, which is plainly visible in the steep increase in the price of gold since 1971.

The decline of the dollar has removed the only ‘safe’ storehouse of wealth. The dollar was considered safe in the last 60 years after the Second World War. The value was reduced to one-half upon abandonment of the gold standard in 1971. The American economy continued to dominate the world, however, because it was the largest and technologically most advanced. The remaining value of the dollar has declined in the last two decades, in part, because of the wars launched by that country. The global investors are reluctant to invest their money in dollar-denominated assets like US Treasury Bonds, property in Manhattan or shares of US companies because the future of the US economy and value of the dollar are no longer stable. My assessment is that the world economy will face another crisis, perhaps worse than the present one, in the coming two-three years. The US Dollar, European Euro and Japanese Yen will all crumble because the high wages of these economies are no longer sustainable against the high-technology low-wage combination wielded by India and China.

The global investors are today looking for an alternative storehouse to keep their wealth. They want to exit the dollareuro and yenThis alternative storehouse they are finding in GOLD. Thus, the price of gold is likely to increase more in the near future. There may be a temporary decline for a year or so as the Western economies grow on the back of the stimulus packages. But this facade will collapse as soon as the time comes to pay for the stimulus packages. Therefore,GOLD is likely to shine in the times to come.

From Wikipedia, the free encyclopedia

Dr. Bharat Jhunjhunwala

Born 1950
Education University of Florida, Kanpur University
Occupation Columnist and consultant

Dr. Bharat Jhunjhunwala acquired his Bachelor’s Degree in Science (Physics, Chemistry and Mathematics) from Kanpur University and doctorate in Food and Resource Economics from University of Florida in 1973 at the age of 23. He has published academic papers inThe American Economist and the Southern Economic Journal.

He was Assistant Professor of Economics at the Indian Institute of Management, Bangalore. He has been a freelance columnist and consultant to donors and NGOs since 1993.


15 Invest Tips to avoid fraud


1) Always ensure to use your own pen while filling application form and/or cheques. The era of frauds using invisible ink of agents has just begun and ensures to put lines in the blank areas both in the cheques and application, not leaving space for anyone to fill the blank columns. In case the application is filled by the agent, read all the writings carefully and ensure that, the data filled is correct and matches with your records.
2) Always ensure to write application number, your name, mobile phone no., fund/scheme name on the back of the cheque. If you’re giving renewal premium cheque, write your policy/folio number also
 3) Check for renewal date and payment frequency carefully in your policy document. It has come to notice that many agents had taken the cheque from customers for yearly mode or half-yearly mode & has submitted the documents on monthly mode. If possible use online premium payment.
4) Deal with only certified financial planner, AMFI certified distributor or IRDA certified insurance agent. Do not deal with sub-brokers as they are not fully trained and do not have complete knowledge about the products they are selling on behalf of the main agent.
5) Always check the identity card of the person to whom you are dealing with. Check the company name and date of validity of the card. Generally, IRDA license is valid for 3 years and AMFI license is valid for 5 years from the date of issuance / renewal.
6) Do not blindly trust anyone even if you know him / her from several years. Always ask for official brochure of the product you are dealing with and see everything written there. Read all fine prints carefully and ensure that, whatever your agent explained to you related to the products are correctly matching with official offer documents or the policy proposal form.
7) Ask for official illustration of the insurance product or fact sheet of mutual fund before investing. In most of the cases the investment returns and other benefits explained in the illustration is based on some assumptions.  In 90% cases the agent will try to convince you that, the return worked out in the illustration should be guaranteed and you are going to receive all the benefits at the maturity of the investment. This investment mistakes had happed to so many investors those who have invested in ULIP policies issued by insurance companies and badly burned their fingers. Lakhs of people are victims of this scam ( I can confidently use the word scam here, because the poor investors are cheated by the agents and insurance companies showing unimaginable returns and other benefits … otherwise we can call this as day light robbery). Mostly all insurance products are long term in nature. After 10-20 years, if happened something wrong also, who is going to complain and you will not be able to trace your agent also.
8) Understand the product fully before investing to ensure that the investment you are making is match with your risk appetite and return expectations
9) Insist your adviser to show the comparison with other competitive products. You may like some feature of other product which your advisor does not like.
10) Note down the  agent / distributor full contact details before submitting application forms like full name, ARN No. or IRDA license no., branch address & phone no., residential address & phone no. – mobile phone & landline, email address etc.
11) Always put the date whenever you sign on important documents.
12) When you get your policy bond / statement of account/ investment certificate, check all the details like your name, contact details, nominee name and other relevant details. Go through all the documents. Pay attention to the charges portion carefully. Insurance companies normally give photocopy of your filled application form along with your signed official illustration with policy bond. If you are not satisfying with the terms and conditions, you can return the original policy bond with 15-days free look-up period and get your money back.
13) Whenever you sign on a document having multiple pages, ensure to sign on all pages
I am in the process of preparing a comprehensive guide for common men financial planning and a comprehensive excel template for realistic asset allocation, identification of risk aspects and investment planning. I am sure, this book will be very beneficial for financial planning.  I have received a very good response for my NRI guide. Like NRI guide I am planning to give this valuable e-book to my readers absolutely free of cost.
14) Do not reply to any  mails received from unknown persons offering gifts and huge amount of prize money.  Never provide your bank account and other personal details to this fraud people.
15) Do not share your ATM PIN and and password details with any one