Gold: Down and out?

By Yash Sood

Name: Gold.

Symbol: Au.

Number: 79.

Price in 2012: Rs 32,000/10 grams. (Increasing rapidly!)

Price in 2013: Rs 29000/10 grams.

“I think gold’s heading south of a thousand,” remarked David Baskin. I could not agree more on this statement, neither will anyone who has been following its prices since the year 2001. Gold prices, since the ‘Brown Bottom’ period, have always been rising. But that was until 2013. The metal posted its first annual loss in 13 years in 2013. The prices of the ‘ultimate asset bubble’ are down by 28% and it seems unlikely that it’s going to bounce back soon. But what has led to this drastic turnaround? Let’s look at some reasons which may be affecting it:

• Inflation in the developed nations is subdued, thus gold is not seen as an inflation hedge.

• The attractiveness for gold as a safe asset is reducing with the acceleration of the US economy.

• Physical demand from India is reducing since the increase in gold import duty and other measures aimed at decreasing the current account deficit are taking place.

But, in all this there’s a big reason which is going unseen by many. Most central banks are already insolvent and many ‘rich’ countries are going bankrupt. And the US is going through another sad phase. Debts are rising and there are not enough tax revenues to cover mandatory spending and even the interest on the debts. Politicians are raising taxes, imposing capital controls and even restricted gold importation. Thus, people are going for stocks and bonds rather than gold. Despite plummeting gold prices, global production of gold, remarkably, reached a record in 2013. We may be on the verge of another global economic crisis, if things stay the way as they are which may prove to be highly beneficial for gold, even though it may slide even further in the meantime. I, personally, would not consider gold down and out just yet.

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