Inter Dependency Between Gold Price Trend And Value Of Indian Rupees

Most of the countries have their own central bank such as the Federal Reserve is the central bank of United States. First let’s discuss about the Gold Reserve, gold reserve is where the gold was held by a national central bank. There are many reasons why central bank reserve the gold, one of the reasons is to support the value of the national

In the beginning of the use of fiat currency, many governments backed the value of the currency with gold. For a while, thirty five United States Dollars could be traded for 1 Troy ounce of gold at a bank. Today however, the USD is no longer backed by gold. Most money today is “just worthless paper”, and if the government endorsing that money fails, it turns that currency into useless paper. (This is causes hyperinflation and recently happened to the Zimbabwean dollar.)

After World War II, the Bretton Woods Agreement established the gold standard and two support institutions called the International Monetary Fund (IMF) and the World Bank. This would lead to a shift, away from the gold standard, to more relaxed systems. The idea of currency purely backed by gold was slowly being shifted to a trust based currency. These institutions purpose was to regulate the economies by injecting or taking money in a process called sterilization. Sterilization is to protect certain countries from a going bankrupt. If a country goes bankrupt, it chain a chain reaction of bankruptcies. So, in order to maintain balance, currencies need to be stable enough, so that it can be in debt without having to declare bankruptcy. The idea is

Because countries on gold standard had a common backing of currency, it was easy to exchange currencies without worrying about expensive transaction costs. The common currency backing was convenient for traders, but it also limited governments ability to raise inflation rates. Niall Ferguson writes in the Ascent of Money, “the long run stability of prices acted as an anchor for inflation expectations” (Ferguson 59). Because governments could control prices based on the amount of gold stored in inventory, the risk of inflation was low because the amount of gold stored was stable. This means prices do not fluctuate as much on a gold standard compared to fiat money. This stability is why there may still be sound reasoning for implementing a gold-backed

At the end of World War Two, the Bretton Woods system was established for world currencies. This system involved countries fixing their currencies to the US Dollar, which in turn was tied to the value of gold at a fixed exchange rate of $35 per ounce. As this was a fixed exchange rate system it effectively forced countries to pursue a certain monetary policy, in order to keep their currency pegged to the Dollar and in turn the value of gold.

Attaching money to good and promising convertibility is recognized as the gold standard. By 1880, furthermost of the world’s main trading nations, together with Great Britain, Germany, Japan, and the US, had accepted the gold standard. Specified a cooperative gold standard, the worth of any money in elements of any additional coinage was informal to

With exchange rates now set in stone (fixed), the gold standard made sure that price levels around the globe move together. This dual movement occurred automatically with a balance-of-payments/ adjustment process also known or called the price-specie-flow mechanism. This is how the flow mechanism worked. Suppose that a grand technological innovation produced faster economic growth in the United States. Now because the supply of money (gold) was fixed/set in the short run, U.S. prices dropped. This lead to the Prices of U.S. exports falling in relation to the prices of our imports. This caused other countries to demand more U.S. exports and Americas demand for imports fell. This resulted in the United States creating a balance of-payments surplus,

Investors' Attitudes: Investors tend to turn to gold when there is economic uncertainty. Gold is typically considered to be a safe haven and a hedge against inflation, currency devaluation, political instability or deflation; most investors believe that gold will always have value, but other investments may turn out to be worthless. When returns on investments such as real estate and bonds fall, more people turn to investing in gold, increasing its

One of the characteristics of gold standard defined by Temin is that the adjustment mechanism for a trade deficit country was deflation rather than devaluation, that is, a change in domestic prices instead of a change in the exchange rate. In the event of a balance-of-payment deficit, countries on the gold standard could not devalue their currencies or expand the money supply to stimulate domestic demand, because by doing so would push up good prices, encourage more gold exports, and weaken the currency. Instead, they could only tighten monetary conditions with the goal of reducing domestic prices and costs until international balance was restored. “Critical to this process was the effort to reduce wages, the largest element in costs.” That is to say, the gold standard system must be maintained at the expense of the welfare of ordinary people, which they must either experienced wages fall or unemployment. This mechanism worked well to facilitate trade and exchange before the First World War, the reason,

In the past 2 years, the global economy experienced the U.S. dollar increased against other major currencies and oil prices continue its freefall, amongst many other macroeconomic events. Conventional wisdom, which proved to be true, suggests the health of the U.S. dollar has an inverse relationship on the price of imports and in this case a strong U.S. dollar decreases the price of imports. However a breakdown of import prices for consumer discretionary goods tend not to move with changes in the U.S. dollar as foreign firms choose to keep maintain their prices in the U.S. market. Instead, the connection between import prices and the U.S. dollar is reflected by the tendency for commodity prices to fall when the dollar strengthens. As we know, the commodity markets is quoted in U.S. dollars, so it may seem intuitive that when the dollar increase, commodity prices will decrease. Simply, a stronger U.S. dollar directly impacts U.S. inflation which is channeled through falling commodity prices than cheaper consumer goods. Therefore a key factor to consider in anticipating how inflation will be affected by a stronger dollar is the behavior of commodity prices.

Before there was the American dollar, the English pound or the Chinese yuan, there was and always will be gold and precious metals. Standing the test of economic roller coaster rides, gold endures when other currencies collapse.

Purchasing silver bullion coins may provide a useful hedge against inflation. Even when the value of the dollar goes down, these coins should retain their value. Precious metals are often a store of value in times of rising prices. In the 1970's the price of silver rose, in part, due to the increasing rate of inflation. Investors who purchased silver saw their investment grow.

Gold has been controversial in recent years due to the sharp increase in gold price. Global Economic Crisis in the year 2008 brought about uncertainty in the global economy. Jewelry, healthcare, and industrial applications involve the use of gold. Investment in gold by governments, institutions, private persons and households is another use of gold. Gold became insurance in economic uncertainty. In uncertain and fragile macroeconomic conditions, we can get protection from inflation through gold. Gold price is a good indicator to evaluate the health of the economy. Gold price becomes high in the unhealthy economy because the investors start assembling gold to protect them from inflation. Drop in gold price means the economy is healthy, as investors switch from gold to other more profitable investments like bonds, stocks, real estate, etc. To understand the economy, therefore, it is vital to understand the fluctuations in gold prices.

There are countries which have greater economic power through increased exports and those which have limited economic power caused by increased imports resulting in a trade deficit. Trade discrepancy between nations made the gold standard difficult to implement since it failed to take into consideration two fundamental pillars of monetarism. Say’s law and quantity theory are the key components of monetarism, they highlight that excess money is spent and not hoarded. However, this was not the case with the gold standard which saw many countries bleed out their gold reserves. Sequentially, economic policies which supported the rigidity of the gold standard had to be done away with, since it brought the world financial market to the brink of collapse (Paul, Robert and Llewellyn

The U.S. dollar index has exhibited a clear long-term downward trend since 2002. This is a cause for concern among emerging markets because a large proportion of their foreign exchange reserves is held in dollar denominated assets. The dollar accounts for 62 percent of allocated foreign exchange reserves around the world and for 58 percent of the allocated reserves of emerging and developing economies . Most central banks would incur considerable losses on their investments if the depreciation of the dollar continues in the future. Even if the depreciation of the dollar does not impact the attractiveness of U.S. securities now, it poses a significant challenge to the “exorbitant privilege” of the dollar as an international reserve and investment currency.