Inflated Gold Price

Gold price has touched unprecedented heights world-wide and especially in Pakistan. It has broken all the previous records. Gold is known for its value not only in making jewelry but it also has monetary value. Due to the unpredictability of the world’s economy the investors are now thinking to invest in gold. The article is intended at discussing the factors which have resulted into the sharp surge in the price of gold.

The main cause of the increase was massive quantitative easing in the US and growing inflationary pressure in emerging economies, encouraged investors to avoid paper currency and invest into gold. The paper currency value is declining day by day, therefore it not a reliable source of investment. The hike in the price of gold has also been linked to several causes. China has been buying a lot of gold lately and so have several European countries. The rapid industrialization in China and people’s reaction to the weakening of the US dollar against other currencies are contributing to the rise in global gold prices.

The price increase was 30 per cent in 2010 and 25 per cent in 2009. Gold prices are also on the rise because central banks of many countries and global investment companies continue to shift in their assets from falling dollar value and dollar backed assets to gold. The investors are pulling out their money from shares backed funds. Besides, a new class of rich is emerging in China and India is also contributing to additional demand for gold.

Price of gold in the local market is rising too. It was less than Rs16,000 per 10 gram in early 2008 rose to Rs51,725 per 10 gram, 24k on 21 April, 2011. Stock investors, real estate buyers and individuals including housewives and widows and pensioners prefer to invest in gold.

The gold price continued its journey upward in 2011 and touched to record high. The prices reached Rs57,800 per tola, and further rose to Rs60,800 per ten grams. While it increased to $1786 and later $1800 per ounce in international market. In August 2011 alone, gold prices increased by Rs4,214 per tola, while in international market its price increased by $127 per ounce. It was due to the poor returns on bonds, no immediate signs of revival in the world largest economies and higher buying by China, India, South Korea and some European countries.

There is blinking the fact that demand for gold is spread all over the world. East Asia, the Indian sub-continent and the Middle East accounted for 70 per cent of world demand in 2008. About 55 per cent of demand comes from five countries, India, Italy, Turkey, USA and China. Jewellery consumes about two thirds of gold. In the 12 months, to December 2008, this amounted to $61 billion, making jewellery one of the world’s largest consumers of gold. USA is the largest market for gold jewellery, whereas India is the largest consumer in volume terms, accounting for 24 per cent of total demand. The economic crisis and the consequent recessionary pressures of 2007-08 had negatively impacted consumer spending and resulted in the reduced volume of jewellery sales, particularly in western markets.

Generally, jewellery demand is a combination of affordability and desirability by consumers. It rises when prices are stable or gradually increasing and declines in the periods of price volatility. The gold follows an 8 year cycle, with prices likely to its peak, above $2,000, but that sudden rise will not stay long and fall at the same or speedier and prices could retreat to $1,000 by 2015, said experts. They said this is the bubble that will burst sooner or later. However, the gold investors are wondering how much higher the gold and silver would climb. The analysis shows that the price of gold had risen from $600 an ounce to more than $1,400 an ounce in less than five years. It also indicated that gold would have important position in future investment.

Presently, gold is supposed to be the safest haven for investment, besides high returns on investment and hedging became the driving force behind the rising prices of gold in the global markets. Gold prices in the international market gained 7.7 per cent in 2011. Over the last one year, gold prices in India have risen by 35 per cent, in Pakistan 48 per cent and this was because of the current poor outlook for the global economies, the rising inflationary pressure and the weakness of the US dollar against other major currencies, that may result gold price at $2,000 per ounce on international demand by end 2011. Investors have lost confidence in the bourses across the major stocks exchanges, besides the spread of the debt crisis that has now engulfed the euro zone’s third and fourth largest economies, Italy and Spain. A new trend was observed in Mexico City, a fewer customers are coming to buy bullion but a large number of people are interested to sell their ornaments, due to fetching high prices.

Investors of Pakistan are also diversifying their investment into gold, because such investments typically have had an inverse relationship with stock market movements. Technology has changed the environment in which there are very few obstacles today to hind investors from buying or selling assets anywhere in the world. Owing to sharp increase in gold and jewellery prices and lack of personal security sale of original gold jewellery sets is falling. As a result purchasing of imitation jewellery is gaining popularity and they are fast becoming dearer.

The importance of gold in several cultures also ensures that the precious metal will remain in high demand for the foreseeable future. The region surrounding Pakistan is dominated by Muslim and Hindu cultures, two religions that have festivals that lead to a big increase in gold purchases by people. From engagements and weddings to religious festivals, gold plays a role in most celebrations all over the world.

The pressure from Pakistan’s high demand for gold has led other countries to raise their rates as well. Thus due to the high gold price in Pakistan it is able to afford these inflated rates because they recover their expenditures on jewelry exports. Jewelry in Pakistan is famous for its unique design and high world class quality, but exports in 2010 dropped by more than 40 percent. Many are still optimistic and are hoping that the Pakistani government will improve its policy on gold import and exports to encourage the trade of gold in the country.

The record breaking high of the gold price in Pakistan has people scrambling to get a piece of the action. Most investors agree that the demand will not slow down any time soon. The unique attitude of the Pakistani people towards gold will continue to drive the rates up. The stable demand and the importance of gold in the region guarantee a steady return on investment. With the current state that the current worldwide economy is in, Pakistan is seen today as one of the best places to invest in gold.