Haven’t you played with bubbles when you were young? You blew them out of a small bottle and these bubbles rose in the air .After flying for some time they burst. Doesn’t this remind you of the speculative bubbles that occur in Commodities, Real Estate and so on? Isn’t this similar to a balloon where you continuously blow it up with air and after sometime it bursts? This is the same thing that happens in gold. Here a spike in the prices of a commodity like gold is caused due to the exaggerated expectations of growth followed by a rapid price rise. When these expectations are not met the rapidly rising prices are followed by a great fall….This is the speculative bubble….Here we have the famous proverb "Do Not Look Where You Fell But Where You Slipped". This tells us how experience is a great teacher. Here even though we fall we must rise again. I would like to remind all of you that the team of Financial Planners at IndianMoney.com are always there for you to plan your financial needs in a most effective and efficient manner. You can explore this unique Free Advisory Service just by giving a missed call on 022 6181 6111.
We all noticed a strange phenomenon in the month of April. Gold which was rising at tear away prices suddenly experienced a great fall crashing to an 18 month low. So why did this happen? The answer lies in a small tax haven island country in the Mediterranean Sea. This country a tax haven propped up by loads of Russian money .The Russian Elite and Wealthy stashed their wealth most of it ill gotten in the offshore tax haven of Cyprus. So Why Did Cyprus Banks Collapse?
Here Cyprus pledged to sell a part of its gold reserves to fund the bailout .Cyprus has a total of about 14 Tonnes of Gold .This translates to a minuscule amount. Here Cyprus was not promised more funds in bailouts no matter what its financial status was and even though it required maybe 2-3 times the sanctioned amount. There are other bigger nations such as Spain, Portugal, Italy and Hungary whose central banks might be forced to sell Gold Bullion to fund their bailout packages thereby flooding the markets with gold. Obviously with such plentiful supply the prices of gold would have to come down. Here even though Cyprus is a small problem it is a symbol of a much bigger Contagion.
Here a current account deficit is when a country’s government, businesses and individuals imports more goods and services and capital than it exports. Here we have a trade deficit where the country imports more goods and services than it exports. This is the largest component of the current account deficit. The second largest deficit is when payments made to foreigners by Indian/Indian government is greater than the wages, interest, and dividends made by the foreigners to Indian residents. The smallest component would be Indian government grants to foreigners. Here in the pharmaceutical category we see patents, product development and so on. We are a nation of gold importers because of our craze for the yellow metal. The world’s largest consumer of gold drove the demand for gold in the global market in the fourth quarter ending December 2012 with a whopping 41% year on year increase. So What Happened To Our Current Account Deficit Due To Ihe Importing Of Gold? India’s current account deficit widened to a record 6.7% of GDP in Q4 led by higher gold imports. According to the finance minister Mr Chidambaram about 80% of this is due to gold imports as India and China together account for about 45% of the world’s gold demand .Here India imported a record 255 tonnes in the October-December Q4 2012 .Here India’s gold import bill for the year 2012 crossed 40 Billion Dollars. Here in April 2013 we noticed a crash in the gold and oil prices which is good for the Indian Macro economy at large. Here we would notice a moderate fall in Wholesale price index, fall in inflation, Governments fuel and fertilizer bill subsidy, which provides room to policy holders to perhaps cut the interest rates. Here it is anticipated that the gold import bill will go down by 8 Billion Dollars due to the crash in prices in this year. Here we had an average Current Account Deficit Of 5.3% of Gross Domestic Product in the year 2012.This is expected to reduce to about 4.3% of the Current Account Deficit. Truly a God Sent Blessing.....
I would like to end this article with the phrase "As Gold Is Tried By Fire So Are Brave Men By Adversity."Let us not lose heart by this gold crash and just as "The Darkest Hour Is Just Before The Dawn" gold too will once again have its "Hay Days In The Sun". I would advise all my readers to look up the website IndianMoney.com in order to upgrade their knowledge on financial planning.
The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.
Subscribe to our Youtube Channel