Academic journal article Journal of Finance, Accounting and Management

An Analytical Perspective of Global Melt Down Vis-A-Vis Perceptible Escalation in Gold Price with Special Reference to India

Academic journal article Journal of Finance, Accounting and Management

An Analytical Perspective of Global Melt Down Vis-A-Vis Perceptible Escalation in Gold Price with Special Reference to India

Article excerpt

Introduction

Ever since global financial crisis erupted, there seems to be a perceptible escalation in gold price. Although a number of reasons conjectured, the augmentations of the official reserves of gold across many countries have been widely perceived as one of the important cause for spiraling gold price. Similarly, India's purchase of gold also viewed with the rationale that the uncertainty of the major reserve currencies, (viz., the dollar and euro) spurred central banks, including India and China, to buy gold. The Reserve Bank had stated that gold bought with the intent to diversify its foreign exchange reserve, which is not common among the central banks. India has continued rapid growth, which will have significant impact on income and savings, will increase gold purchasing by almost 3% per annum over the next decade. In gold terms, India is a market with significant scale. In 2010, total annual consumer demand reached 963.1 tones. As seen in the last decade, Indian demand for gold was driven by savings and real income levels, not by price. The rise of India as an economic power will continue to have gold at its heart. India already occupies a unique position in the world gold market and, as private wealth in India surges over the next ten years, so will Indian demand for gold. In parallel to growth, socio and demographic challenges will need to address given its immense diversity. This also applies to the gold market. Gold touched a new all-time high level by rising to Rs 29,295 per 10 grams, driven by sustained buying by stockiest and jewelers to meet the demand for the ongoing marriage season, amid a firming global trend. Nevertheless, gold purchasing will continue, underpinned by India's long-standing and deep cultural affinity for gold, a love affair that transcends generations and makes India unlike any other gold market. Against this background, the following sections highlight the Global Melt down vis-a-vis Perceptible Escalation in Gold Price which broadly drawn from the crisis in the context of India.

Review of Literature

A quick survey of literature reveals that the major reserve management objectives of central banks, in general, put in the order of their importance, viz., safety, liquidity and return. The blend and ordering of these interrelated objectives depend on country-specific factors, such as the country's exchange rate regime, its credit worthiness and its degree of vulnerability to external shocks as well as the range of domestic instruments available for monetary operations. Even for the same central bank, the ordering can vary depending upon the macroeconomic and financial market conditions. It also added that, international reserves play a qualitatively different and more important precautionary and monetary role in EMEs than advanced economies. Most notably, the unique feature of the "Great Recession' was that, it virtually put even the long trusted financial institutions, to "acid test' on their competence of "liquid portfolio' management. Moreover, brought to the fore the extraordinary vulnerability of the global financial system to disruptions in wholesale funding markets (IMF, 2011B). Even century old financial institutions reduced to rubble. It is distressing to note that, even after the lapse of three years, the global recovery remains elusive and heavily reliant on monetary and fiscal stimulus for whatever little growth it has, making a quick reversal in the fiscal situation unlikely (IMF, 2010). Downside risks were increasing and continued to do so in early Financial Year 2011 (IMF, 2011A). In fact, symptoms of excessive risk taking are evident in a few advanced and a number of emerging market economies (IMF, 2011B). Pihalman et al. (2010) put the above objectives in the form of umbrella of "self-insurance" against financial shocks and sudden stops in the access to international capital markets. The World Gold Council research shows that by 2020 cumulative annual demand for gold in India will increase to excess of 1200 tones or approximately Rs. …

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