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Gold Prices Surge Amid Global Uncertainty

Published: 11th May, 2024

Context

Gold prices have been reaching record highs, with spot gold rising from USD 2000 per ounce a year ago to USD 2294 per ounce now, a 14% increase.

  • Causes of Surge: Factors like trade tensions, financial conflicts among global powers, high interest rates in advanced economies, and ongoing wars, particularly in the Middle East, are driving this surge in gold prices.

1: Dimension- Gold as a Safe Haven Investment

  • Historical Resilience: Gold has historically been prized for its scarcity and intrinsic value, making it resilient during economic instability, geopolitical crises, and market downturns.
  • Investor Preference: Investors turn to gold as a "safe haven" asset during uncertain times due to its stability and tendency to maintain or appreciate in value over time.
  • Equity Market Influence: Record equity market valuations indirectly drive demand for gold as a portfolio diversifier, with institutional investors, retail investors, and central banks globally increasing their gold purchases.
  • Interest Rate Dynamics: Institutional investors anticipate potential interest rate cuts by the U.S. Federal Reserve, leading to increased gold acquisitions.
  • Rationale for Gold Holdings: Gold serves as a stable asset during financial crises, offering stability during currency volatility and market turbulence.

2: Dimension- Global Trends in Gold Acquisition

  • Diversification Strategy (reduced reliance on dollars): Central banks worldwide are accumulating significant quantities of gold to diversify their foreign exchange reserves, reducing reliance on the U.S. dollar.
  • China's Strategy: China has been on a continuous gold buying spree to diversify its reserves away from the dollar and hedge against currency depreciation.
  • India's Resurgence: India has seen an increase in gold purchases, with the Reserve Bank of India (RBI) adding significant amounts to its reserves in recent years.
  • Overall Gold Reserves: The United States leads in gold reserves, followed by Germany, Italy, France, and the Russian Federation. India ranks ninth in terms of gold reserves held by a country.
    • Overall, the RBI currently holds 822 tonnes of gold, which accounts for 8.98% of the entire forex reserves, as per the World Gold Council.

Fact Box:

Government Gold Schemes

  • Gold Monetisation Scheme (GMS), 2015: Under the Gold Monetization Scheme, the nation's institutions and households contribute gold to be used more productively and, eventually, to lessen the country's dependency on gold imports.
  • Sovereign Gold Bond (SGB): Sovereign Gold Bond Scheme was launched under Gold Monetization Scheme. SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold.
  • Indian Gold Coin Scheme (IGC): It was launched to reduce import of foreign minted gold bullion or coins.

World Gold Council 

  • Founded in: 1987
  • HeadquartersLondon, United Kingdom
  • The World Gold Council is the authority on Gold.
  • It is an international trade association for the gold industry based in the United Kingdom.

UPSC MAINS PYQ (Related)

Q: Craze for gold in Indians has led to a surge in import of gold in recent years and put pressure on balance of payments and external value of rupee. In view of this, examine the merits of the Gold Monetization Scheme. (2015)

UPSC PRELIMS PYQ

Q. What is/are the purpose/purposes of the Government’s ‘Sovereign Gold Bond Scheme’ and ‘Gold Monetization Scheme’? (UPSC 2016)

  1. To bring the idle gold lying with Indian households into the economy
  2. To promote FDI in the gold and jewellery sector
  3. To reduce India’s dependence on gold imports

Select the correct answer using the code given below.

  1. 1 only
  2. 2 and 3 only
  3. 1 and 3 only
  4. 1, 2 and 3

Solution: (c)

X

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