CHAPTER 1:

INTRODUCTION

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 CHAPTER 1: INTRODUCTION
Those Who Do Not Learn History Are Doomed to Repeat It
The above quote is an adaptation of the quote of writer and philosopher George Santayana,
and in its original form it read,
"Those who cannot remember the past are condemned to repeat it."
Consider what humorist and writer Mark Twain said on the matter:
"History doesn't repeat itself, but it often rhymes."

Financial history is littered with boom-bust cycles, and the recurrence of these cycles leads one
to believe that history repeats itself. However, the underlying theme, financial asset,
participants, and events differ in each case. There are recurring cycles, ups and downs, but the
overall course of events is consistent, with minor variations. History, it has been said, repeats
itself. This may not be entirely correct; it simply rhymes. That is the reason that financial
advisor studies the history of various asset classes to get a better return by forecasting future
prices.

Out of all the asset classes – Equity, Commodity, Debt, and Currency – Gold has been a
favourite topic of research for many researchers. Gold is a wonderful long-term and short-term
investment. One of gold's benefits is that it is regarded as a universally valuable commodity.
It's also a valuable item that can be traded for cash. Gold is unlike any other asset in terms of
liquidity. At any time, gold owners can convert their assets to cash. Because it is accepted by
people all over the world, it might be diluted not only in India but also anywhere else. Gold is
a desirable commodity that is both easy to handle and has a measurable worth. Unlike most
other commodities, gold has fascinated humanity for hundreds of years and continues to do so
today because it is a durable, easy-to-transport metal that is widely accepted and verified.
(Worthington & Pahlavani, 2007).

Gold is often used as a hedging instrument. Gold's status as a hedge means that it can help
investors compensate for big losses. In simple terms, hedging is used to mitigate the risk of a
loss on an investment or asset depreciation. Economic instability is unlikely to prompt investors
to turn to gold as a hedge against the risks of inflation becoming too high. Gold is considered
2
not only a commodity but also a financial asset. Gold is a store of wealth, which signifies safe
storage, in addition to being a hedge. Many investors nowadays are interested in maintaining
gold as a long-term asset investment. Gold is one of the hedging techniques, according to
(Wang, 2013). Rather than retaining stock or paper money, the future liquidity of the gold value
is more efficient.

The desire for gold is centuries old and shows no signs of ebbing. The metal's enduring value
is determined primarily by scarcity: it accounts for only one 500,000,000th of the Earth's crust.
We could put all of the gold ever mined into a 22-metre-square cube. Nuclear explosions inside
or between stars generated gold billions of years ago. Some deposits have been present at the
Earth's core since its formation, while others have been smashed onto the planet's surface by
asteroids. It ended up buried beneath mountains, concealed beneath seas and scattered around
the world's waterways. According to current estimates, around 50,000 tonnes (worth more than
£2 billion) have still to be discovered.

A standard bar of gold weighs roughly 12kg and is about twice as dense as lead. Gold, despite
its weight, is remarkably nimble. An ounce of it can be drawn into a five-mile-long wire or
beaten into a hundred-fold-thinner-than-paper sheet. It does not corrode, rust, or deteriorate like
most other materials. This makes it infinitely recyclable: you could be wearing gold that
previously belonged to King Solomon or Cleopatra.

Many ancient cultures considered the metal to be divine. The Egyptians referred to it as "the
flesh of the gods," while the Incas referred to it as "sweat" or "tears" of the sun. These celestial
associations have not vanished: the chemical symbol for gold, Au, stems from the Latin aurum,
which derives from Aurora, which means "dawn." From Tutankhamun to Midas, Augustus the
Strong to Louis the Sun King, rulers surrounded themselves with gold because its gleaming
surfaces are a perfect emblem for immortality. It's why, more than 2,000 years ago, gold was
placed on a newborn in a manger – a baby who, like the rising sun, rose from the dead1.

1
Fox, J. (2022, January). Why we go for gold | The Spectator. https://www.spectator.co.uk/article/why-we-go-
for-gold
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 1.1 Gold Investment International Scenario

1.1.1 Investment

When anyone wants to invest in gold, one can obtain ownership of the asset and profit if the
price of the precious metal rises. Depending on whether one is interested in the physical
commodity or not, one can trade or invest in a variety of gold assets2. These are some examples:
• Gold bullion
Individual investors and banks alike use physical gold – in the form of coins and bars – as a
store of value. However, the high costs of storage and insurance frequently prevent more active
investors from purchasing the metal outright.
• Spot gold
The spot price of gold is the cost of purchasing gold in advance – or on the spot. One troy ounce
of gold is usually the price. Spot gold trading is a popular way to gain exposure to bullion
without needing to buy the precious metal.
• Gold futures
Futures contracts allow you to trade gold for a predetermined price at a future date. You'd have
to keep your part of the bargain, whether it's through a physical or monetary settlement.
Quantity and quality are standardised in futures contracts; only the price is determined by
market forces.
• Gold options
Options contracts are similar to futures contracts in that they do not need you to execute the
trade at the time of purchase. Options allow you to trade physical gold or gold futures at a
predetermined price on a predetermined date. A call option holder has the right to buy the
precious metal, whilst a put option holder has the right to sell it.
• Gold ETFs
ETFs monitor the performance of a diversified portfolio of publicly-traded gold mining,
refining, and producing companies. Trading or investing in an ETF provides you with a much
broader exposure than a single position, making it a popular approach to diversifying a
portfolio. ETFs are low-cost investments that strive to replicate market returns rather than
outperform them.

2
How to trade or invest in gold. (n.d.). IG. Retrieved August 9, 2022, from
https://www.ig.com/en/commodities/gold-trading/how-to-trade-gold
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1.1.2 Trading

Gold is traded 24 hours a day, five days a week all over the world. Because the trading hours
of gold exchanges throughout the world overlap, live gold prices are available at all times of
the business week, from late Sunday night to Friday evening.

The spot price is the current price at which gold can be purchased or sold in significant
quantities for immediate delivery. The futures price is the price at which a given date in the
future can be delivered. Futures and spot prices are linked, with futures prices often higher than
spot prices. If a spot price is not available at a given time, an actively traded near-term futures
price can be discounted. Gold is traded on organized exchanges, such as futures exchanges like
the CME, and COMEX in New York, which generate large trading volumes and play a vital
role in price discovery.

London Gold Fix - It is a gold pricing and trading exercise undertaken twice a day by five
market-making members of the London Bullion Market Association (LBMA) to determine a
single trading price for all orders placed by the five participants and their clients. HSBC,
Barclays Capital, Scotia Bank, Deutsche Bank, and SociétéGénérale, the current members of
the fixing process, undertake the fix through a firm called the London Gold Market Fixing Ltd.
There are two gold fixes every day, one at 10.30 a.m. and the other at 3 p.m. Because of the
strong liquidity, the fixing allows for large amounts of anonymous trade and low spreads. The
market is then informed of the fixing price, which is quoted in US Dollars, British pounds, and
Euros3.

The gold fixing process not only makes trading easier, but also creates a benchmark price that
is used to price a variety of commercial gold products, such as gold derivatives, ETFs, and
structured products, as well as a valuation point for central banks reserve portfolios and
institutional investor portfolios. The PM gold fixing price is widely recognized as the more
widely used of the two fixes as a benchmark price.

3
GoldCore Limited. (n.d.). Comprehensive Guide To The Gold Price. Retrieved August 9, 2022, from
https://info.goldcore.com/comprehensive-guide-to-the-gold-2019

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Futures Market Gold Prices - The CME Group's COMEX futures market in New York is the
most prominent place for trading gold futures. After the US government abolished the ban on
citizen gold ownership in 1974, gold futures trading began. COMEX trading takes place in an
open-outcry market in a trading pit, followed by after-hours trading on the CME Globex
computer platform. February, April, June, August, and September are the most active contract
months for gold futures on the COMEX. Because the majority of futures deals are conducted
for hedging and speculation, the actual delivery of metal is rare. Physical delivery is, however,
possible, and the exchange maintains several gold depositories4.

1.1.3 International Gold Price Performance

Gold has always been regarded as valuable, although it wasn't utilized for money until roughly
550 BCE. In 30 BCE, the Romans were the first to establish an official gold price. Emperor
Augustus, who ruled from 31 BCE to 14 CE in ancient Rome, established the price of gold at
40-42 coins per pound. To put it another way, a pound of gold may provide 40-42 coins5.

The global gold standard and the USD standard regulated the gold price from 1900 to 1971.
Since 1972, however, gold has been separated from the US currency. When the International
Monetary Fund (IMF) passed the Jamaica Agreement in 1976, gold began to move from money
to a regular product, and its price has been determined by market supply and demand ever
since6.

4 GoldCore Limited. (n.d.). Comprehensive Guide To The Gold Price. Retrieved August 9, 2022, from
https://info.goldcore.com/comprehensive-guide-to-the-gold-2019
5 Kimberly Amadeo. (2022, May). Historical Gold Prices: 30 BCE to Today. The Balance.

https://www.thebalance.com/gold-price-history-3305646
6 Mishra, P.K. & J.R.Das, & Mishra, Santosh. (2010). Gold Price Volatility and Stock Market Returns in India.

American Journal of Scientific Research. 9. 47-55.

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 Table 1.1 Gold Price Performance in major currencies from 2000 to 2021

Source: Monthly Gold Campus – August 2022 – Incrementum AG7

Looking at the above table, it can be inferred that gold has given more than a 9% average return
in the last 20 years. While returns have been highest in rupee terms have been highest, by
around 12% on average, this is because of USDINR depreciation being reflected in Indian gold
prices.

7
Stöferle, R. (2022, August 2). August 2022 Monthly Gold Compass. Incrementum.
https://www.incrementum.li/en/journal/august-2022-monthly-gold-compass/

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 1.2 Determinants of International Gold prices

1.2.1 Fundamental Determinants

a) Gold Jewellery Demand

The current gold market is a kaleidoscope of change and expansion. The amount of gold
purchased annually has roughly trebled since the early 1970s, and gold markets around the
world have flourished. Gold has emotional, cultural, and financial value, and people buy it
for a variety of reasons all over the world, with national socio-cultural factors, local market
conditions, and macroeconomic factors all playing a role 8.

Because gold is utilised in so many diverse applications – jewellery, technology, central

banks, and investors – different segments of the gold market develop at different times during
the global economic cycle. The diverse nature of gold demand, as well as the market's self-
balancing nature, enhances gold's robust features as an investment asset.

Gold jewellery is the largest source of annual gold demand per sector. Despite declining in
recent decades, it still accounts for over half of the total gold demand. India and China are
the largest jewellery marketplaces in the world, accounting for more than half of all global
sales. It may seem self-evident, yet people's demand for gold rises as their income rises. This
is true in all markets for retail investors as well as fashion and lifestyle consumers. It may
seem self-evident, yet people's demand for gold rises as their income rises. This is true in all
markets for retail investors as well as fashion and lifestyle consumers 9.

b) Gold Supply

Mine output provides for the majority of world gold supply - over 75% every year on average.
Annual demand, on the other hand, necessitates more gold than can be mined, and the
shortfall is made up through recycling. Mine production does not react fast to price changes.

8
Global Gold Demand. (n.d.). World Gold Council. Retrieved August 9, 2022, from
https://www.gold.org/about-gold/gold-demand
9
World Gold Council. (n.d.). New Gold Market Insights and Analysis | World Gold Council. Retrieved
August 9, 2022, from https://retailinsights.gold/

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 Table 1.2 Gold Demand and Supply

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Supply
Mine production 2,754.5 2,876.9 2,957.2 3,166.8 3,262.4 3,366.3 3,515.4 3,578.2 3,652.5 3,598.5 3,474.7 3,560.7
Net producer hedging -108.8 22.5 -45.3 -27.9 104.9 12.9 37.6 -25.5 -12.4 6.2 -45.9 -44.5
Recycled gold 1,671.1 1,626.1 1,637.1 1,197.0 1,131.5 1,069.6 1,232.7 1,111.4 1,132.2 1,273.2 1,292.3 1,149.9
Total supply 4,316.7 4,525.5 4,549.0 4,335.9 4,498.8 4,448.8 4,785.8 4,664.0 4,772.3 4,877.9 4,721.1 4,666.1

Demand
Jewellery fabrication 2,044.9 2,096.4 2,140.9 2,735.3 2,544.4 2,479.2 2,018.8 2,257.5 2,284.6 2,137.7 1,327.4 2,220.9
Jewellery consumption 2,057.1 2,104.1 2,157.0 2,725.4 2,533.2 2,459.9 2,103.9 2,241.0 2,248.5 2,123.2 1,401.1 2,123.6
Jewellery inventory -12.1 -7.8 -16.1 9.9 11.2 19.4 -85.1 16.5 36.2 14.5 -73.7 97.3
Technology 460.7 429.1 382.3 355.8 348.4 331.7 323.0 332.6 334.8 326.0 302.8 330.2
Electronics 326.7 316.6 289.1 279.2 277.5 262.1 255.6 265.6 268.4 262.3 249.3 272.0
Other Industrial 88.3 76.4 64.7 53.7 51.2 51.0 49.8 50.7 51.2 49.8 41.6 46.8
Dentistry 45.6 36.2 28.4 22.8 19.6 18.6 17.6 16.3 15.3 13.9 11.9 11.4
Investment 1,596.5 1,769.0 1,592.3 793.2 932.2 978.8 1,655.1 1,309.6 1,173.3 1,274.9 1,773.6 1,007.1
Total bar and coin 1,204.3 1,501.9 1,322.2 1,729.6 1,066.5 1,091.4 1,073.1 1,043.9 1,090.3 866.7 899.6 1,180.4
Bars 921.2 1,189.5 1,023.1 1,357.3 780.4 790.2 797.2 779.7 775.4 579.2 537.7 804.3
Official Coins 195.9 228.3 187.5 270.9 205.5 225.2 208.2 188.1 241.9 220.7 292.9 291.3
Medals/Imitation Coins 87.2 84.2 111.7 101.4 80.7 76.0 67.7 76.1 73.0 66.8 69.1 84.8
ETFs & similar products 392.2 267.1 270.1 -936.4 -134.3 -112.6 582.0 265.7 83.0 408.2 874.0 -173.3
Central banks & other inst. 79.2 480.8 569.2 629.5 601.1 579.6 394.9 378.6 656.2 605.4 255.0 463.1
Gold demand 4,181.2 4,775.3 4,684.7 4,513.7 4,426.1 4,369.3 4,391.7 4,278.2 4,449.0 4,344.0 3,658.8 4,021.3
OTC and other 135.5 -249.9 -135.6 -177.9 72.7 79.5 394.1 385.8 323.3 534.0 1,062.3 644.8
Total demand 4,316.7 4,525.5 4,549.0 4,335.9 4,498.8 4,448.8 4,785.8 4,664.0 4,772.3 4,877.9 4,721.1 4,666.1
LBMA Gold Price (US$/oz) 1224.52 1571.52 1668.98 1411.23 1266.4 1160.06 1250.8 1257.15 1268.49 1392.6 1769.59 1798.61

Source: World Gold Council – Gold Demand Trends 2021

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 Figure 1.1: Gold Demand and Supply 2021

Source – Metal Focus, World Gold Council – Gold Demand Trends 202110

10
WGC. (2022, January). Gold Demand Trends Full Year 2021. World Gold Council. https://www.gold.org/goldhub/research/gold-demand-trends/gold-demand-trends-
full-year-2021

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Between prospecting for – and discovering – new gold reserves and a mine going into
production, there is normally a significant period of time. Because gold is nearly indestructible,
nearly all of the gold ever mined is theoretically still accessible in some form and might be
recycled. Recycling is the gold supply source that reacts most quickly to changes in the gold
market and economic shocks. The vast bulk of recycled gold — at least 90% – originates from
jewellery, with gold retrieved from technology providing the remaining ten per cent.11

c) Central Bank Demand

Gold has been a significant part of governments' financial reserves for decades, and its appeal
shows no signs of decreasing, with central banks forecast to remain net buyers of gold over the
next ten years. Indeed, central banks now own about a fifth of all gold ever mined, with over
35,000 metric tonnes in their possession. Central banks buy gold for a variety of reasons, such as
a safe-haven asset and a portfolio diversifier.

Because gold and government bonds have no credit or counterparty problems, they operate as a
source of trust in a country and all economic circumstances. Gold's appeal is boosted by the fact
that it has an inverse relationship with the US dollar, another important reserve asset. When the
value of the dollar falls, gold rises, allowing central banks to protect their holdings during market
turmoil12.
Table 1.3: World Official Gold Holdings of Top 10 Countries (as of 2021)
Tonnes % of reserves
1 United States 8,133.5 67.6%
2 Germany 3,358.5 67.3%
3 IMF 2,814.0 --
4 Italy 2,451.8 64.3%
5 France 2,436.5 59.6%
6 Russian Federation 2,298.5 22.1%
7 China, P.R.: Mainland 1,948.3 3.5%
8 Switzerland 1,040.0 5.8%
9 Japan 846.0 3.8%
10 India 758.0 7.3%

11
Gold Supply | Sources of Gold. World Gold Council. Retrieved August 9, 2022, from https://www.gold.org/gold-
supply
12
Why central banks buy gold. (2022, February 2). Reuters. https://www.reuters.com/sponsored/article/why-
central-banks-buy-gold

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 Source: World Gold Council13
d) Gold ETF Demand
Purchasing a gold ETF is equivalent to purchasing gold in electronic form. A gold ETF, or
Exchange-traded fund, is a commodity ETF with only one principal asset: gold. Exchange-traded
funds behave similarly to individual equities and trade on the same exchanges. However, the fund
itself contains gold derivative contracts that are backed by gold. As a result, if someone invests in
a gold ETF, they will not own any gold. Even when they redeem gold ETFs, they do not obtain
the precious metal in any form. Instead, as an investor, they will receive the cash equivalent.

Figure 1.2: Gold ETF Holdings by Region

4000
3500
3000
In Tonnes

2500
2000
1500
1000
500
0
2011

2016
2003
2004
2005
2006
2007
2008
2009
2010

2012
2013
2014
2015

2017
2018
2019
2020
2021
North America Europe Asia Other

Source: World Gold Council, Researcher

Gold ETFs are not so popular a form of investment in India and other Asian countries as can be
seen in the chart above. Investors like to hold gold in physical form in Asian countries. The total
holding of a dozen gold ETFs in India is mere 37 tonnes as of 2021, which is just 1.2% of the
world's total gold ETF holdings of 3050 tonnes in 2021.

State Street Global Advisors manages and markets SPDR Gold Shares (also known as SPDR Gold
Trust), the world's largest gold ETF. Unlike many ETFs, which reflect ownership in a basket of
stocks, this ETF represents a portion of gold bullion. SPDR Gold Shares Gold ETF was originally
listed on the New York Stock Exchange in November 2004 and has been traded on the NYSE Arca

13
Gold Reserves by Country 2021. (n.d.). World Gold Council. Retrieved August 9, 2022, from
https://www.gold.org/goldhub/data/gold-reserves-by-country

12
since December 13, 2007. Its holdings are close to 1000 tonnes, and it also trades on the Singapore
Stock Exchange, Tokyo Stock Exchange, The Stock Exchange of Hong Kong, and the Mexican
Stock Exchange.
Figure 1.3 ETF Inflows of Top 5 funds
4500
4000
3500
3000
(in tonnes)

2500
2000
1500
1000
500
0
2006

2013
2003
2004
2005

2007
2008
2009
2010
2011
2012

2014
2015
2016
2017
2018
2019
2020
2021
SPDR iShares WisdomTree Invesco Gold Xetra Gold Others
Source: WGC, Researcher

When there is more safe-heaven demand for gold, investors invest in gold ETF and in turn
Gold prices rise. The gold price has a positive relationship with gold ETFs holdings. In fact,
the availability of ETFs has shifted price discovery for gold and silver to the ETF market
(Ivanov, 2011).
Figure 1.4: Total Gold ETF Holdings and Gold Prices

Source: Bloomberg, WGC, Researcher

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1.2.2 Macroeconomic Determinants

a) Interest Rate
The US Federal Reserve's monetary policy is crucial for financial market participants, particularly
those who trade and hold gold. On the one hand, the Fed is raising short-term interest rates, making
gold more expensive to hold: the higher the interest rate, the greater the lost income that could
have been gained by holding interest-yielding assets rather than gold. As a result, as interest rates
rise, so does the demand for gold, and consequently its market price.

On the other hand, the FED's continuous interest rate hikes risk making the present cyclical
upswing unsustainable, which has been set in motion by the Fed's exceptionally low-interest-rate
policy. If and when interest rates rise too high, consumption and investment fall off the cliff,
borrowers default on debt payments, and the economy enters a slump. Needless to say, a
contracting economy would put significant strain on the monetary and financial systems - and
would almost certainly enhance demand for a "safe-haven" asset such as gold.

Having said that, we've noticed two opposing patterns in the FED's monetary policy: While higher
interest rates discourage demand for gold, they increase the possibility of a systemic collapse,
which would almost certainly enhance demand for the "Gold Currency." However, for the time
being, investors have stayed relatively calm and optimistic. The reasons are as follows: the
economy continues to grow at a reasonable pace; unemployment is low; credit markets are liquid
and supply funding at reasonable borrowing prices, and the stock market continues to roar at full
throttle.

b) GDP
GDP growth is a significant long-run driver of gold prices via a variety of avenues, including:

• Gold Jewelry demand is positively related to increased income.

• Gold demand in technology applications rises in tandem with economic growth.
• As wealth grows, so does the allocation of household savings to gold.

Long-term gold prices have historically been influenced most positively by GDP growth in
emerging markets, most recently in emerging Asia and the United States.

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c) Inflation
Gold is often lauded as a hedge against inflation, rising in value when the purchasing power of
the dollar falls. An inflation hedge is an investment that is thought to preserve a currency's
declining purchasing power as a result of the loss of its value due to rising costs, either
macroeconomically or due to inflation. It usually entails investing in an item that is intended to
retain or increase in value over a fixed length of time 14.

By the end of 2021, US Inflation which is measured in terms of Consumer Price Inflation (CPI),
Producer Price Index (PPI), Personal Consumption Expenditure (PCE) and 5yr Breakeven
Inflation rate was at 40-year high levels as the COVID-19 pandemic in 2020 disturbed the supply
chains and led to many bottlenecks and disruption. This leads to a rise in commodity prices and
in turn rise in inflation.

Figure 1.5 Inflation and Gold

Source: Bloomberg, Researcher

d) Employment Report
The Employment Situation Summary, generally known as the employment or jobs report, is
released by the Bureau of Labor Statistics (BLS) on the first Friday of each month. It determines

14
Chen, J. (2022, January). What Is an Inflation Hedge? Investopedia.
https://www.investopedia.com/terms/i/inflation-hedge.asp

15
the number of people working and unemployed in the economy, as well as the number of hours
they worked in the previous month and a variety of other data. The report is being examined for
what it says about the status of the economy. The quantity of new employment produced might
indicate whether an economy is improving, overheating, or contracting. And so this report
indirectly impacts the Gold prices. Monthly change in Nonfarm payroll data and Unemployment
Rate data is mostly analyzed by market players and bring fluctuations in gold prices.

Figure 1.6 US Unemployment Rate, Change in Nonfarm payroll and gold price

Source: Bloomberg, Researcher

e) Money Supply
The M2 money supply is a measure of all readily available money in the United States economy.
cash, savings deposits, money market accounts, checking deposits, and mutual funds are all
examples of M2. The attitudes of central banks toward money supply have shifted dramatically in
recent years - not only in the United States but around the world. Nixon closed the gold window
in 1971, effectively converting the US dollar into an unbacked fiat currency. Since then, the United
States has seen an exponential expansion in its money supply as well as a catastrophic devaluation
of its currency.

16
Because the gold price mirrors the growth of the money supply, the last 50 years have seen
similarly exponential returns in gold. The most recent bull market in gold is a prime example.
Since 2016, the M2 money supply has increased by 64%, from $12.5 trillion to $20.5 trillion. Gold
climbed 66 % in that time, from $1,050 to $1,780.

Figure 1.7 US Money Supply, FED Balance sheet and gold price

Source: Bloomberg, Researcher

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1.2.3 Technical and Sentimental Determinants

a) Futures and CFTC Open Interest

The Commitment of Traders (COT) report is a weekly publication issued by the Commodity
Futures Trading Commission that illustrates the aggregate holdings of various participants in the
United States futures market (CFTC). COT reports provide the number of long, short, and spread
positions that make up the open interest. Traders can use the report to decide whether to take short
or long positions in their trading. Traders, for example, are classed as non-commercial or
commercial, and this applies to any position they hold within that commodity15.

While COMEX's gold futures positioning is more closely linked to short-term price
speculation, owing to large implied leverage and the expense of holding contracts over longer
periods, positioning remains an essential mood indication for investors over a longer
timeframe. The positioning has a positive correlation with gold prices — increasing longs are
associated with higher gold prices.

Figure 1.8 CFTC Net Position, Gold Price and Open Interest

Source: Bloomberg, Researcher

15
Hayes, A. (2022, July 10). Commitments of Traders Report (COT). Investopedia.
https://www.investopedia.com/terms/c/cot.asp

18
b) Gold-Silver Ratio

The gold-silver ratio, commonly known as the mint ratio, is the relative worth of gold to silver. To
put it simply, the ratio is computed by dividing the price of gold by the price of an equal amount
of silver. If the price of gold per ounce is $1,800 and the price of silver per ounce is $25, the ratio
is 72, or $1,800 divided by $25. In that instance, one ounce of gold can be exchanged for 72 ounces
of silver. This ratio might change daily as the price of gold and silver fluctuates. When gold
outperforms silver, the ratio rises, and vice versa. Because it represents relative worth, the ratio
can change even if gold and silver are both moving in the same direction. The reason we're looking
at the ratio is that it can tell us which of the two precious metals is likely to perform better in the
future16.

Figure 1.9 Gold price and Gold/Silver Ratio

Source: Bloomberg, Researcher

16
Nallamuthu, A. (2021, July 24). Why Gold-Silver ratio is important.
https://www.thehindubusinessline.com/portfolio/commodity-analysis/why-gold-silver-ratio-is-
important/article35515391.ece

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c) Volatility Index and US Economic Policy Uncertainty Index
The CBOE Volatility Index, designated by the ticker symbol VIX, is a widely used indicator of
the stock market's expectation of volatility based on S&P 500 index options. It is also known as
the fear index or fear gauge, and it is calculated and distributed in real-time by the CBOE 17.

Economic policy uncertainty is measured using the Economic Policy Uncertainty Index. It's
computed by looking at how often the words "economy," "policy," and "uncertainty" appear in
newspaper reports in each country. The Economic Policy Uncertainty (EPU) index was devised
by Baker, Bloom, and Davis in 2011. The EPU index's core premise is to quantify the level of
uncertainty in an economy using three pillars: news media, the number of federal tax code
provisions slated to expire in the next years, and expert forecasters' disagreement on future trends
of significant macroeconomic indicators. (Čižmešija et al., 2017).

Both VIX and EPU tend to gauge fear and uncertainty in the market, and when such uncertainty
rises, gold prices tend to rise further. EPU levels above 200 and VIX levels above level 30 tend to
give positive momentum to gold prices.
Figure 1.10 EPU, VIX and Gold price

Source: Bloomberg, Researcher

17
VIX. (2022). In Wikipedia. https://en.wikipedia.org/w/index.php?title=VIX&oldid=1088473987

20
1.2.4 Intermarket Determinants

a) Bond Yields
Economic policy uncertainty is measured using the Economic Policy Uncertainty Index. It's
computed by looking at how often the words "economy," "policy," and "uncertainty" appear in
newspaper reports in each country. The Economic Policy Uncertainty (EPU) index was devised
by Baker, Bloom, and Davis in 2011. The EPU index's core premise is to quantify the level of
uncertainty in an economy using three pillars: news media, the number of federal tax code
provisions slated to expire in the next years, and expert forecasters' disagreement on future trends
of significant macroeconomic indicators.

What matters for gold is real interest rates, not nominal yields (high and increasing inflation rates
affect gold and bonds differently). Gold's significant inverse association with real interest rates 18
is depicted in the graph below. Indeed, the chart's mirror image suggests that real interest rates are
one of the most important predictors of gold prices19.

Figure 1.11 US Treasury Yields, STRIPS and Gold

Source: Bloomberg, Researcher

18
The 10-year inflation indexed Treasury rate is a proxy for U.S. long-term real interest rates
19
Gold and Bond Yields Link Explained | Sunshine Profits. (n.d.). Retrieved August 9, 2022, from
https://www.sunshineprofits.com/gold-silver/dictionary/bond-yields-gold/

21
Separate Trading of Registered Interest and Principal of Securities is abbreviated as STRIPS.
Because they pay no interest or coupon, these bonds are commonly referred to as zero-coupon
bonds. Bonds offered at a discount to their face value are referred to as Treasury STRIPS. When
these bonds mature, the investor is refunded the full-face value of the bonds rather than receiving
interest payments. They mature "on par," in other words. Gold and US Treasury STRIPS Index
have a positive relationship.

b) Currencies
Gold and the US Dollar have a long history together. However, today's gold price is inversely
related to the US Dollars. A rise in the value of the US dollar will result in a drop in gold prices.
Similarly, an increase in the gold rate today will indicate a drop in the value of the US Dollar. The
appreciation and depreciation of the US dollar aid in determining the value of other countries’
currencies20. E.g., The yen is one of the most important fiat currency alternatives to the US dollar.
This is why the yen and gold typically have a positive correlation: both assets are inversely
associated with the dollar and are regarded as safe-havens21.

Figure 1.12 Currencies and Gold prices

Source: Bloomberg, Researcher

20
Retrieved from How Gold Affects Currencies. (n.d.). Policybazaar. Retrieved August 9, 2022, from
https://www.policybazaar.com/gold-rate/articles/how-gold-affects-currencies/
21
Yen and Gold—Key Link Explained | Sunshine Profits. (n.d.). Retrieved August 9, 2022, from
https://www.sunshineprofits.com/gold-silver/dictionary/yen-gold/

22
The relationship between the Chinese yuan and gold fluctuates from positive to negative regularly,
making it unpredictable. The relationship between gold and the Australian dollar, on the other
hand, has been far more stable in the past. The reason for this is that mining is a huge and essential
part of the Australian economy. The Australians are masters at unearthing and selling valuables 22.

c) Equity
The equity market is a risky asset while gold is considered a non-risky asset, therefore there is
mostly an inverse correlation between both the asset classes. This means that when the equity
market outperforms, Gold underperforms and vice versa. The same relationship goes well with
Cryptocurrencies and gold as well.

Figure 1.13 Dow Jones, Bitcoin and Gold price relationship

Source: Bloomberg, Researcher

d) Commodity
When big fund managers do asset allocation or asset reshuffling, they often put money in top
commodities together, or in commodity indices as a whole. The trend of these top commodities
gold, silver, crude Oil and copper often move in tandem with each other, so they have a positive

22
Norris, S. (2018, September 24). The Chinese Yuan vs Gold. How Correlated Are They? Elliottwaveplus.Com.
https://elliottwaveplus.com/the-chinese-yuan-vs-gold-how-correlated-are-they/

23
relationship with each other. Gold and silver are closely interrelated to each other, as both precious
metals are mined together and in fact by-products of each other.

Figure 1.14 Commodity price trend

Source: Bloomberg, Researcher

24
1.3 Gold Investment Indian Scenario

1.3.1 Indian Demand and Supply

Globally, gold demand can be categorized into four: Jewellery demand (55%), Investment demand
(25%), Technology demand (8%) and demand by Central banks (12%). But the trend in India is
different, where only numbers for Jewellery demand (75%) and Investment demand (25%) as
published by World Gold Council. Out of 800 tonnes demand, 600 tonnes is Jewellery Demand
and 200 tonnes Investment demand. In India, Investment Demand constitutes Bar & Coin, Central
Bank buying, and Digital forms of gold (ETF, Sovereign Gold Bond, Digi Gold, etc.).

Indians love to buy gold in the form of jewellery to showcase their wealthy status, so Jewellery
Demand is more. But as Gold Jewellery has the limitation of safety, purity and storage, Indians
are investing more in the digital form of Gold these days. Meanwhile, with gold holdings at 37.6
tonnes as of 2021, Indian investors continued to pour money into Indian gold ETFs, fueled by a
lower price point, concerns about increasing market valuations, and safe-haven demand. Nippon
India ETF is the pioneer in Indian gold ETF and has the highest gold holdings.

Figure 1.15 Holdings of Indian gold ETFs on Indian exchanges

Source: World Gold Council

25
Meanwhile, with gold holdings at 37.6 tonnes as of 2021, Indian investors continued to pour
money into Indian gold ETFs, fueled by a lower price point, concerns about increasing market
valuations, and safe-haven demand.
Figure 1.16 Reserve bank of India gold reserves

Source: World Gold Council

Indians consume around 500 to 600 tonnes of gold in form of Jewellery every year. In Hindu
traditions, gold is thought to be very auspicious. Gold Jewellery have to be worn for important
rites and occasions, according to Manu, the ancient lawgiver. Aside from Dhanteras and Diwali,
one of the most important dates in the Indian calendar, gold is used to mark regional festivals
across the country: Akshaya Tritiya, Pongal, Onam, and Ugadi in the south; Durga Puja in the east;
Gudi Padwa in the west; Baisakhi and Karva Chauth in the north23.

Gold is also important in more personal life events. In Indian tradition, giving gold as a gift is a
deeply embedded aspect of marital customs; weddings account for over half of the country's yearly
gold demand.

23
China’s Gold Market and Demand. (n.d.). World Gold Council. Retrieved August 9, 2022, from
https://www.gold.org/about-gold/gold-demand/india

26
 Figure 1.17 Indian Quarterly Jewellery Demand

Source: World Gold Council, Gold Demand Trends – 2021

Talking about India's gold supply, Imports make up 85-90% as Indian gold mine production is
very negligible around one ton. India imports approximately 1000 tons annually spending almost
3 per cent of the GDP on it. Rest 80-120 tonnes of supply comes from recycled gold.

Table 1.4 Indian Gold Supply

2014 2015 2016 2017 2018 2019 2020 2021

Gross Bullion imports 994.8 1,065.0 642.1 975.3 871.7 827.4 399.6 1,003.4
of which doré24 84.1 229.0 141.9 250.6 275.9 211.5 107.6 219.6
Net bullion imports 898.6 913.6 551.5 879.0 755.7 646.8 349.5 924.6
Scrap 92.5 80.2 79.5 88.4 87.0 119.5 95.5 75.2
Domestic supply from 9.9 9.2 9.9 8.8 10.5 11.1 9.0 6.9
other sources25
Total supply26 1,001.0 1,003.0 640.9 976.2 853.1 777.4 454.0 1,006.7
Source: World Gold Council, Gold Demand Trends – 2021

24
Volume of fine gold material contained in the doré.
25
Domestic supply from local mine production, recovery from imported copper concentrates and disinvestment
26
This supply can be consumed across the three sectors – jewellery, investment and technology. Consequently, the
total supply figure in the table will not add to jewellery plus investment demand for India.

27
1.3.2 Trading

The Multi Commodities Exchange (MCX) and the National Commodity and Derivative Exchange
(NCDEX) are the two commodity exchanges in India. MCX is India's largest commodity exchange
market and the world's sixth-largest. MCX's variation contracts — Gold, Gold Mini, Gold Guinea,
and Gold Petal – account for 98 per cent of the volume of Gold Futures and Options traded. It has
plenty of liquidity, with daily trading of around 15,000 contracts worth over 4500 crores in rupees.
All of these contracts require delivery; consequently, it makes sense to close these contracts at
least 5 days before the contract expires.

The Reserve Bank of India (RBI), the Director-General of Foreign Trade (DGFT), and the Ministry
of Finance all have veto authority over who is allowed to import gold into India. The RBI must
licence banks, while companies must follow international trade policy and have permission to
import gold from the DGFT. The Ministry of Consumer Affairs and the Ministry of Commerce
and Industry control gold as a significant export item. The Ministry of Mines regulates domestic
production through gold mines within the country27.

The Gold (Control) Act of 1968 was adopted by the Indian government in 1968 to regulate gold
trade and possession. However, the act was ultimately repealed due to India's great demand for
gold and its lack of indigenous production, which resulted in gold imports. India's UPA
Government imposed a 2% ad valorem customs levy on gold imports in 2012. Until then, there
was only a nominal charge of Rs 300 on 10 grams of gold. This was done to keep track of all gold
imports. The customs duty on gold was raised to 4% on February 28 and then to 6% on January
21, 2013.

When inflation was growing, the UPA government raised import duties from 6% to 10% on August
13, 2013. Rather than pulling it back, the NDA administration hiked duty to 12.5% on July 5,
2019. In Budget 2021, Finance Minister announced a cut in gold import duties to 7.5% and levied
a 2.5% Agriculture Infrastructure and Development Cess.28

27
Dealing and Trading with Gold in India. (2021). Court Uncourt, 8, 9.
https://heinonline.org/HOL/Page?handle=hein.journals/counco8&id=476&div=&collection=
28
What govt’s decision to reduce import duty on gold says of our addiction to bad policy – ThePrint – Select. (2021,
February). ThePrint. https://theprint.in/opinion/what-govts-decision-to-reduce-import-duties-on-gold-says-of-our-
addiction-to-bad-policy/599979/

28
 Table 1.5 India Gold Import Duty structure

Import Service Tax/ GST Effective Gold Average

Duty on VAT/ Tax and Imports Gold Price
Gold Bars AIDC/SWS Duty (in Tonnes) (Rs /10 gm)29
Upto 2011 300/ 10 gm 1071.0 26400
17-Jan-12 2% 3.3% 5.30% 974.5 31050
16-Mar-12 4% 3.3% 7.30% 974.5 31050
21-Jan-13 6% 3.3% 9.30% 959.4 29600
05-Jun-13 8% 3.3% 11.30% 959.4 29600
13-Aug-13 10% 3.3% 13.30% 959.4 29600
Jan-14 10% 3.3% 13.30% 994.8 28006
Jan-15 10% 3.3% 13.30% 1065.0 28343
Jan-16 10% 3.3% 13.30% 642.1 28623
Jan-17 10% 3.3% 13.30% 975.3 29667
Jan-18 10% 0.30% 3% 13.30% 871.7 31438
Jan-19 10% 0.30% 3% 13.30% 827.4 35220
31-Jan-20 12.50% 3.00% 3% 16.26% 399.6 48651
01-Feb-21 7.50% 12.50% 3% 14.07% 1003.4 48720

Source: Ministry of Commerce, RBI, WGC

1.3.3 Indian Gold price performance and returns

Domestic gold prices in India are heavily influenced by import parity prices, which are decided by
global gold spot prices, the Dollar-Rupee exchange rate, and local taxes and levies. Any change in
world prices is promptly conveyed and reflected in domestic pricing, particularly for nations like
India, which are gold price takers, with imports meeting a substantial amount of demand.

In 1991, the Indian government began the process of globalization and liberalization, enabling
market forces to determine prices. Since then, the government has undertaken several steps to
modernize the gold sector and ensure that India benefits from the international demand influence
it possesses in the gold market. The gold sector has been liberalized in stages, beginning with
allowing several banks to import gold, breaking the State Trading Corporations' monopoly; then
significantly lowering import duties, destroying a lucrative parallel smuggling channel; and finally,
allowing traders, manufacturers, and investors to trade in gold futures in India itself.

29
Historical Gold Rate/Trend in India—Complete Information. (n.d.). Retrieved August 9, 2022, from
https://www.bankbazaar.com/gold-rate/gold-rate-trend-in-india.html

29
In India, gold has outperformed important asset types such as bonds and stocks. Data on asset
returns over 2, 5, and 10 years (up to December 31, 2019) demonstrate that only equities
outperform gold in the long run, despite gold prevailing in the short term.

Figure 1.18 Average Annual Return of key assets

Source: World Gold Council

Gold is less volatile than many individual stocks and stock indexes, as well as particular
commodities, in terms of return volatility. Gold's compounded returns outperform numerous asset
groups, including equities. Over a 15-year or longer timeframe, it has beaten even government
bonds. Since 2010, gold has largely generated positive annual returns and has proven to be a good
portfolio diversifier during periods of economic highs and lows30.

Figure 1.19 Compounded Annual growth rate for major asset classes

Source: World Gold Council

30
How does gold compare to other asset classes? | My Gold Guide. (n.d.). Retrieved August 9, 2022,
from https://www.mygoldguide.in/how-does-gold-compare-to-other-asset-classes

30
1.3.4 Determinants of Indian Gold Price

The 'buy' and 'sell' prices for gold in India are calculated by taking the international price of gold
and multiplying it by the exchange value of the Rupee, as well as adding any import levies and
taxes such as GST. This system assures that gold rates in India are in line with international trends,
and buyers may buy gold without fear of being deceived on gold rates31.

Figure 1.20 Gold and USDINR Weekly price chart

Source: Bloomberg, Researcher

Indian gold Price (Rs/gm) = ((International gold price ($/Oz) x (USDINR exchange rate) /
(Ounce to grams conversion)) + Custom duty + GST

If we want to calculate gold price for 31-Dec-2021, it would be

= (($1827.50 * 74.3375)/31.1) + 14.07%
= 4368.2 +614.6
= 4982.8 Rs/gram

31
How Gold Price is valuated in India—Know complete Information. (n.d.). Retrieved August 9, 2022, from
https://www.bankbazaar.com/gold-rate/gold-price-valuation-in-india.html

31
1.4 Gold – Nothing More, Nothing Less, Nothing Else

Gold – Nothing More

Gold is nothing more than real money. For some investors and advisors, this is a difficult pill to
take. The second half of the phrase is the one that causes the most concern. More than a few people
will readily admit that gold is a legitimate currency. Beyond that, though, there is a propensity to
get carried away with gold "fundamentals" descriptions and analysis. These fundamentals are
numerous and diverse, but they have no bearing on gold or its price.

More people are paying attention as the US dollar's purchasing power continues to erode, and the
price of gold continues to rise. It's fine that investors and customers are price-conscious. The issue
is that most of them don't understand the difference between price and value. The only reason the
price of gold rises is to reflect the US dollar's declining purchasing power. In other words, the
rising price of gold is inversely proportional to the loss of purchasing power of the US dollar.

This means that a higher gold price comes after the impacts of inflation have set in and taken their
toll, rather than before or in anticipation of those effects. Let's be clear: a greater gold price in
dollars at any moment does not indicate a rise in gold's worth and is ALWAYS indicative of dollar
weakness that has already occurred. The value of gold remains constant and unchanged. That is
why gold is the ideal form of currency. Gold is the first form of money, as well as a long-term
store of value.

Gold – Nothing Less

People pay attention to gold when the price is rising, but they tend to ignore it when the price is
falling. When, in their words, "it isn't doing anything," they get utterly disinterested over time. As
a result of gold's "failure to respond" to fundamentals and as a result of its price not reaching or
exceeding expectations, we are currently witnessing some negative reactions.

After gold's high in 1980, something similar happened. Many individuals believed that rapid
inflation would ruin the dollar and that the price of gold would rise much over $1000 oz (it
temporarily peaked at $850 oz.). Discouragement grew stronger over time, and eventually, apathy
32
took over. Inflation's impacts become less and less visible with time. In addition, the stock market
was surging and the economy was expanding.

Gold was under $300 an ounce after twenty years, and it fell as low as $250 an ounce. "Gold is
dead," and "who needs gold?" were prevalent phrases. This was just another example of the general
public's misunderstanding of gold's worth. Because its value had plummeted, the inference of a
"loss of value" and a "poor investment" was made. The US currency, on the other hand, remained
constant or strengthened from 1980 to 2000. The US dollar gained appeal on a global scale as the
impacts of inflation appeared to be waning. Rising gold prices and a weaker dollar contrast with
dropping gold prices and a stable or stronger US currency.

Figure 1.21 Turning point in Gold History

There are five major turning points for gold’s price that are reflected on the chart. All five turning
points (1933, 1971, 1980, 2000, 2011) coincided with major turning points in the US dollar.

Gold is priced in US dollars, and because the US dollar is in constant decline, the price of gold in
US dollars will continue to grow over time. The value of the US dollar fluctuates on a regular
33
basis, and these fluctuations can endure for years, as seen in the periods 1980-2000 and 2011-
2016. Gold's price can and does fall dramatically at these times. We appear to be at such a phase
right now. The price of gold has fallen in the last year and a half, reflecting the strength and stability
of the US dollar. The amount to which the drop continues is determined by how the US dollar
performs.

Gold – Nothing Else

Whenever I am questioned about gold, I always start by saying that it is not an investment. Most
people usually take issue with the proclamation. Some people become enraged. Nonetheless, it is
correct. Gold is neither an investment nor a hedge against inflation. Indeed, even gold is susceptible
to inflation.

Political turbulence, social unrest, insurgency, or war have little effect on the price of gold. Its
price or value does not alter as a result of headline economic indicators or a bad economy. Gold is
not tied to interest rates, the stock market, inflation expectations, or anything else. The ONLY
explanation for gold's rising price over time is the US dollar's ongoing loss of purchasing power –
nothing else.

Conclusion

Unrealistic expectations result from believing in erroneous fundamentals. Unrealistic expectations

almost always result in let-down, which might be accompanied by financial loss. In terms of gold,
the entire precious metals arena is flooded with pronouncements and projections that have no real
basic basis.

34
1.5 References

Čižmešija, M., Lolić, I., & Sorić, P. (2017). Economic policy uncertainty index and economic

activity: What causes what? Croatian Operational Research Review, 8, 563–575.

https://doi.org/10.17535/crorr.2017.0036

Ivanov, S. (2011). The influence of ETFs on the price discovery of gold, silver and oil. Journal

of Economics and Finance, 37. https://doi.org/10.1007/s12197-011-9205-8

Wang, K.-M. (2013). Can gold effectively hedge risks of exchange rate? Journal of Business

Economics and Management, 14. https://doi.org/10.3846/16111699.2012.670133

Worthington, A., & Pahlavani, M. (2007). Gold investment as an inflationary hedge:

Cointegration evidence with allowance for endogenous structural breaks. Applied

Financial Economics Letters, 3. https://doi.org/10.1080/17446540601118301

35