All that glitters

www.hindustantimes.com January 28

People demand gold for various reasons. But in India it is the craving for gold jewellery that makes it the biggest gold consuming nation.

Gold’s fascination also lies partly in its primary role as the successful basis for monetary arrangements throughout most of world history. Britain became the champion of the gold standard. The pivotal intellectual figure behind the overthrow of the gold standard was John Maynard Keynes who termed gold a ‘barbarous relic’. He urged Britain not to return to the gold standard after World War I but pursue a managed currency, focusing on domestic price stability. The gold standard was finally abandoned in 1971 when the US suspended the convertibility of dollars into gold.

But investment in gold has continued and gold prices are determined by the demand and supply situation. When people are jittery about the value of other assets — as when war clouds loom  on the horizon — they opt for gold. After 9/11, there was a spurt in demand  and gold prices rose by 25 per cent in 2002. Since then, the US stock market has not  picked up due to many reasons among which were the collapse of Enron and the revelation of dubious book-keeping practices by other giant corporations.

People disillusioned by the world economy are thus betting on gold. The rising oil prices may further delay the stock markets from picking up. The recent strike by Venezuela’s oil workers has already had an impact on world oil prices (they shot up to $ 33 a barrel) and there is speculation about the fate of the oilfields of Iraq. A war could disrupt Iraqi production and OPEC could hike the prices. In any case, markets would remain volatile and the dollar may remain low as compared to the euro and the yen. Only when stability returns, other options may look more attractive than gold.