Gold recently moved towards US$1400, a two-year high, having risen over 30% since January 2016.
This has been largely based on broad negative pressures in the global economy: ongoing economic troubles and terror attacks in the Eurozone; weakening demand in China; and domestic crises ending positive growth prospects for the BRICS. Not to mention political events Brexit and the growing uncertainty around November’s US presidential election too.
During pressures such as these, investors habitually “flee to gold”, assessing it as a safe bastion of value. However this tendency has been in direct contradiction to the most famous investor of the last 30 years, Warren Buffett, who famously dismissed gold as a “non-functioning”.
Still – from a historical central banking perspective – an oscillating value for gold was surprising. Historically, money in economies have been tied to gold – either using it physically for trade or symbolically under the Bretton Woods system. Then, when President Nixon ended the gold window in the August 1971 at $35, many economists predicted a collapse of the price of gold – because the core demand for gold as state reserves disappeared. Paper money was supposed to allow more direct control over economies through currency manipulation and gold would simply be used for jewellery. However, this has not been the case – with US$:oz values rocketing and gold becoming a consistent investment tool like no other.
In India there is a government scheme to encourage the circulation of gold trapped in private hands to help encourage domestic economic growth. It creates a domestic source of capital that did not previously exist and reduces the reliance on temperamental foreign direct investment.
The theory is that the increased circulation of value will encourage capitalist forces to prompt and deepen private investment throughout the economy – instead of the country’s vast private golden wealth sitting idle in inactive private hands.