Impact of Inflation on Gold
Gold was first discovered as shining, yellow nuggets. "Gold is where you find it," so the saying goes, and gold was first discovered in its natural state, in streams all over the world. No doubt it was the first metal known to early hominids. Gold became a part of every human culture. Its brilliance, natural beauty, and luster, and its great malleability and resistance to tarnish made it enjoyable to work and play with.
Gold was the first metal widely known to our species. When thinking about the historical progress of technology, we consider the development of iron and copper-working as the greatest contributions to our species' economic and cultural progress - but gold came first.
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“The story of gold has a deeper message, one that has none of the transitory qualities of what we choose to use as money. Seen in this broader sense, the story of gold has no ending.” -Peter Bernstein
In India, gold is as much a thing to be possessed as it is a concept. The word ‘gold’ in the ancient texts has wide meaning and connotations, ranging from the mundane to the sublime. In the Sanskrit language there are at least seven synonyms for gold, viz. Swarna, Suvarna, Hiranya, Kanak, Kanchan, Hem and Ashtapada. Gold in India serves many functions and wearing it has several implications. At the most obvious level, it is a form of adornment, and also a status symbol. For Hindus, gold is associated with most religious ceremonies, such as the naming ceremony or marriage. To signify marital status, Hindu women wear a special kind of necklace, which consist of gold pendants strung in a certain combination with beads made up of other materials. In certain parts of the country a goldsmith pierces a newborn child’s ear with a gold pin in a ritual performed twelve days after it is born, often only in a symbolic manner though. The Indian epics, such as Ramayana and the Mahabharata are replete with descriptions of ornaments. Practitioners of traditional medicine in India claim that pure gold has several therapeutic qualities: when consumed regularly, gold is good for circulation of the blood and enhancement of the mind and lifting the spirit; gold applied to skin helps combat ageing. These claims, however, are not supported by modern medical science. Does gold have any taste? High quality gold is tasteless, as per the discerning connoisseur, who claims that gold tastes very good when eaten with chocolate.
Gold vs. realized inflation
The central banks lead us to inflation or deflation, because it is too late to maintain any balance in the business cycle, and defaults are now an unavoidable event in the not so distant future, which will cause gold to skyrocket in value.
The chart below shows the inflation rate (CPI Yoy) vs. the one year change in the price of gold. It’s clear that the lines seem correlated back in the 70’s and 80′s, but lose their relationship in the past decade. This makes it difficult to believe that the recent increase in price of gold has been solely due to a change in realized inflation and weakens the case for gold as a good inflation hedge.
Tata unveils $4.6m gold-plated wonder car in India
Until it decided to don the favourite metal of most Indians, gold, it was the world's cheapest car. But, what went in as a $ 2000 Tata Nano emerged as a $4.7 million wonder, leaving most Indians gasping with awe.
There isn’t much empirical evidence to make one believe that the decade long gold rally has exclusively to do with either realized inflation, inflation expectations or the federal reserves balance sheet. However, based upon our previous post about the macro exposure obtained by buying/selling gold, thinking of gold simply as a hedge for inflation may miss the bigger picture. The fundamental reason gold has value is that it is an alternative to paper currency, and what makes gold attractive to hold vs. a paper currency is what it yields on a real basis. While high inflation rates might be one variable that goes into determining whether a currency is attractive to hold, it is likely not the whole picture. It is key to understand that the exposure you obtain from buying/selling gold is not exclusively linked to the inflation rate. Buying gold now is the lowest risk investment you can make. And the upside is a once-in-a-lifetime opportunity.
Overview
Gold was first discovered as shining, yellow nuggets. "Gold is where you find it," so the saying goes, and gold was first discovered in its natural state, in streams all over the world. No doubt it was the first metal known to early hominids. Gold became a part of every human culture. Its brilliance, natural beauty, and luster, and its great malleability and resistance to tarnish made it enjoyable to work and play with.Because gold is dispersed widely throughout the geologic world, its discovery occurred to many different groups in many different locales. And nearly everyone who found it was impressed with it, and so was the developing culture in which they lived.
Gold is the easiest of the metals to work. It occurs in a virtually pure and workable state, whereas most other metals tend to be found in ore-bodies that pose some difficulty in smelting. Gold's early uses were no doubt ornamental, and its brilliance and permanence (it neither corrodes nor tarnishes) linked it to deities and royalty in early civilizations.
Gold has always been powerful stuff. The earliest history of human interaction with gold is long lost to us, but its association with the gods, with immortality, and with wealth itself is common to many cultures throughout the world. Early civilizations equated gold with gods and rulers, and gold was sought in their name and dedicated to their glorification. Humans almost intuitively place a high value on gold, equating it with power, beauty, and the cultural elite. And since gold is widely distributed all over the globe, we find this same thinking about gold throughout ancient and modern civilizations everywhere. Gold, beauty, and power have always gone together. Gold in ancient times was made into shrines and idols ("the Golden Calf"), plates, cups, vases and vessels of all kinds, and of course, jewelry for personal adornment
The "Gold of Troy" treasure hoard excavated in Turkey and dating to the era 2450 -2600 B.C., show the range of gold-work from delicate jewelry to a gold gravy boat weighing a full troy pound. This was a time when gold was highly valued, but had not yet become money itself. Rather, it was owned by the powerful and well-connected, or made into objects of worship, or used to decorate sacred locations.
Gold has always had value to humans, even before it was money. This is demonstrated by the extraordinary efforts made to obtain it. Prospecting for gold was a worldwide effort going back thousands of years, even before the first money in the form of gold coins appeared about 700 B.C.
In the quest for gold by the Phoenicians, Egyptians, Indians, Hittites, Chinese, and others, prisoners of war were sent to work the mines, as were slaves and criminals. And this happened during a time when gold had no value as 'money,' but was just considered a desirable commodity in and of it.
The 'value' of gold was accepted all over the world. Today, as in ancient times, the intrinsic appeal of gold itself has that universal appeal to humans. But how did gold come to be a commodity, a measurable unit of value? Gold, measured out, became money. Gold's beauty, scarcity, unique density (no other metal outside the platinum group is as heavy), and the ease by which it could be melted, formed, and measured made it a natural trading medium. Gold gave rise to the concept of money itself: portable, private, and permanent. Gold (and silver) in standardized coins came to replace barter arrangements, and made trade in the Classic period much easier.
In India, gold is as much a thing to be possessed as it is a concept. The word ‘gold’ in the ancient texts has wide meaning and connotations, ranging from the mundane to the sublime. In the Sanskrit language there are at least seven synonyms for gold, viz. Swarna, Suvarna, Hiranya, Kanak, Kanchan, Hem and Ashtapada. Gold in India serves many functions and wearing it has several implications. At the most obvious level, it is a form of adornment, and also a status symbol. For Hindus, gold is associated with most religious ceremonies, such as the naming ceremony or marriage. To signify marital status, Hindu women wear a special kind of necklace, which consist of gold pendants strung in a certain combination with beads made up of other materials. In certain parts of the country a goldsmith pierces a newborn child’s ear with a gold pin in a ritual performed twelve days after it is born, often only in a symbolic manner though. The Indian epics, such as Ramayana and the Mahabharata are replete with descriptions of ornaments. Practitioners of traditional medicine in India claim that pure gold has several therapeutic qualities: when consumed regularly, gold is good for circulation of the blood and enhancement of the mind and lifting the spirit; gold applied to skin helps combat ageing. These claims, however, are not supported by modern medical science. Does gold have any taste? High quality gold is tasteless, as per the discerning connoisseur, who claims that gold tastes very good when eaten with chocolate.In India goldsmiths are usually men, and are referred to by a variety of names depending on the region. In the Vedic period (Second Millennium BC), goldsmiths had a much higher standing in society than most other artisans, probably because they worked with a precious metal. The goldsmiths enjoyed royal patronage. Historical evidence suggests that Indian jewellers had early mastery of the various skills required to make fine jewellery, such as mixing alloys, moulding, setting stones, inlay work, relief, drawing gold and silver into fine wires, plating and gilding. The duties of the goldsmith have been defined in an ancient social code, but are observed more by breach than by adherence. There is hardly any village or town, even in the remote corners of the country, where there is no goldsmith.
Today, the gold/jewellery industry is fast-growing, with impressive domestic and export sales. Gems and jewellery constitute one of the fastest growing export sectors in India, accounting for one-fifth of the aggregate exports. The current size of the gold economy is around US$ 6 billion and employs over half a million people. The number of gold jewellery manufacturing units is put at 100,000. Also, a large number of skilled goldsmiths/gold merchants from India are engaged in gold trade and industry in almost all the oil-rich Middle Eastern countries. However, for a long time in the existence of the gold economy, the producers and consumers
The price of gold depends on a host of factors, which makes it very difficult to predict. In a fashion similar to shares, gold is an asset class by itself. In fact, in many villages and small towns of India, gold is preferred to bank deposits as a savings and investment instrument.
Till a year ago, to gain from price volatility, one would have to hoard and trade in gold physically. Not any more, however. With the commodity futures market operating in full swing, one has the option of not physically stocking gold to gain from its price movements.
Let us see how trading in futures is better than the option of hoarding gold. Firstly, there are several costs associated with the process of physically stocking gold. The costs include the cost of the gold itself, the cost of carrying, cost of physical storage, finance cost and last, but not the least, the safety element. While futures might have some advantages, there is also a danger of losing big as your risks are also magnified and hence, one must tread carefully in this area.
In this context, if the going cost of gold is Rs 6000 per 10 grams, with an investment of Rs 6 lakh, one can buy 1kg of gold. Now, suppose, three months hence, when the going price of gold is Rs 6,500 per 10 grams, the person decides to sell the gold. The gross profit made by the person is Rs 500 for every 10 grams and hence, for 1 kg, it stands at Rs 50,000. To arrive at the net profit, one would have to deduct the cost of financing; the cost of storage in a bank and transaction costs, including sales taxes.
In this context, if the going cost of gold is Rs 6000 per 10 grams, with an investment of Rs 6 lakh, one can buy 1kg of gold. Now, suppose, three months hence, when the going price of gold is Rs 6,500 per 10 grams, the person decides to sell the gold. The gross profit made by the person is Rs 500 for every 10 grams and hence, for 1 kg, it stands at Rs 50,000. To arrive at the net profit, one would have to deduct the cost of financing; the cost of storage in a bank and transaction costs, including sales taxes.
We often hear the phrase that gold is an “inflation hedge”. If gold were the perfect inflation hedge, then changes in gold prices would be perfectly contemporaneously correlated with the rate of inflation. Is this actually true?
Gold vs. realized inflation
Gold Value Increases during Extreme Deflation (or Inflation):
As explained, "How Derivatives Compete With Gold" and "Derivatives Are Competing With Gold!", that "interest rates" are set by the free market (of individual decisions) if on a 100% gold legal tender standard, because no one can control the supply of gold money. Fiat paper/electronic money empowers a central bank to create/destroy (and thus control the supply of) legal tender money and thus the "interest rates". When "interest rates" are set higher than the free market (of individual decisions) would, then supply of legal tender money is in deflation. When "interest rates" are set lower than the free market would, then supply of legal tender money is in inflation.
Again, reiterate that "interest rate" is the "opportunity cost" on investment, so don't confuse this with Fed Funds or even bond rates. Perhaps a reasonable proxy for "interest rate" is long-term bond rates minus money supply inflation, but money supply inflation is not accurately reported and bond rates are being manipulated by CPI lies, direct central bank intervention (buying/selling) via Repo contracts, and other factors. Thus we have no accurate measure of "interest rate" when on a fiat money standard, which is precisely the reason that (the deception of) derivates can compete with gold.
It is implied the fact that gold can gain no value when it is the legal tender money (100% gold standard), because the free market of "interest rates" is inherently in competitive balance, as thus the legal tender gold money supply is nearly constant (no centralized manipulative force able to create/destroy money) with the free market of individuals deciding the necessary return for investing their money.
When fiat money standard and perceived "interest rates" are set higher than free market, either by deflation of fiat money supply or by deceptive reporting of CPI, real GDP, and M3, then the value of gold decreases. As explained by Dr. Fekete, this is because a (deceptive) higher return can be obtained in fiat derivatives from the higher than free market "interest rates". The deception is that the risks of defaults, or the swing of the business cycle, may not be properly factored, especially if the underlying data on CPI (and thus real GDP) and money supply inflation are deceptively reported or not reported.
Gold History Charts: Indian Rupees
Inflation gold prize chart
On a weekly basis, spot gold prices declined around 2 percent as fall in crude oil prices affected the inflation-led demand for gold. However, weakness in the US dollar resisted further decline in the yellow metal. On the MCX, Gold February contract rose almost 1 percent due to depreciation in the Indian Rupee which led to rise on the domestic bourses and hit an all-time high of Rs29,433 last week. Holdings in the SPDR Gold Trust, world's largest gold-backed exchange traded-fund (ETF), declined by 0.2 percent to 1,295.40 tonnes on 9th December 2011 from the previous 1,297.93 tonnes on 2nd December 2011.
Tata unveils $4.6m gold-plated wonder car in India
India's Tata group set a new gold standard for cars to help showcase 5,000 years of Indian jewellery-making and India's craze for gold with a fully functional gold-plated Nano
Nano is the World’s first Gold Jewellery |
Goldplus, a jewellery brand from Titan Industries, a Tata group company, unveiled the world's first-ever gold jewellery car in Mumbai, in a rare honour in praise of the 5,000 years of Indian Jewellery tradition and craftsmanship. Three years after the initial launch of the Nano, the chairman of India's second largest industrial group, Ratan Tata showcased what may likely be the world's most expensive car - a 22 carat gold, jewel and ruby encrusted wonder.
The Tata group has interests in steel, (Tata Steel became the sixth largest steel maker in the world after it acquired Corus) and automobiles, (Tata Motors is among the top five commercial vehicle manufacturers in the world and recently acquired Jaguar and Land Rover) among seven other business sectors. According to C K Venkataraman, chief operating officer, ``The idea was very simple. Through this effort we wanted to showcase the expertise of diverse Indian jewellery-making proficiency. Nothing could have been better than a Tata Nano, as there is a perfect synergy between the two brands that cater to the common man.''
Termed a `golden chariot' by its owners, 30 artists from GoldPlus were employed to decorate the tiny car in 80 kilos of 22 carat gold, 15 kilo of silver and 10,000 semi precious stones and gems. "Paying homage to 5,000 years of jewellery tradition in India, we created the world's first gold jewellery car incorporating a variety of techniques,'' said Bhaskar Bhat, managing director of Titan Industries. In all, 14 different jewellery-making techniques were used to represent the diverse and culturally distinct jewellery practices across India.
"Since eternity [sic], jewellery made with gold and precious stones has been an integral part of the Indian woman's life. Jewellery for Indians is an embodiment of culture and tradition and so over the years, craftsmen have meticulously used their unmatched skills to showcase this in their designs. Our brand Goldplus aims to offer a wide range of beautifully crafted jewellery with traditional and intricate designs,'' Bhat added.
Incidentally, this is not the first time the company has decided to put its best foot forward and show that their products are indeed worth their weight in gold. In 2008, Goldplus manufactured a giant gold bangle that measured six feet in diameter and brought in 300,000 visitors when it was taken on tour of Goldplus stores around the country. There are 29 Goldplus stores across five states of India. The Tata group and Goldplus intend to take the Goldplus Nano car on a nationwide tour across all Goldplus stores for the next six months.
Billionaire Ratan Tata - who recently bought Jaguar Land Rover to add to his collection of auto firms - ordered the one-off design to celebrate the strength of his country's growing wealth and mark its cultural history. The truly ornamental asset has precious and semi precious stones including rubies, pearls, emeralds, and the black beads worn by Hindu brides to ward off the evil eye. It has intricate filigree work and traditional Indian embroidery work on metal - Meenakari work (enamel), kundan (foil-backed stone setting) and naqashi (gold chasing) work, all of which represents the diverse and culturally distinct jewellery techniques from across the nation.
"Around 500 years from now, it would be quite a family heirloom, wouldn't it,'' chirped Venkataraman. Sadly, the gold version of the car is not for sale and would serve only as a memento, company officials said. The lifestyle and jewellery arm of the Tata Group, Titan Industries, spent $5.38 million in raw materials to create the gold plated Nano. The company has plans for spending $41.43 million for expansion next fiscal and hopes to close this fiscal with a top line of about $18.64 billion (Rs 9000 crore). The Tata Group Nano car - made with gold and silver, and studded with precious stones - worth an astronomical over Rs.22 Crore ($4600000) as a tribute to the 5000 yrs of Indian Jewellery making.
Goldplus Nano Car is made with 80 Kg of 22 carat gold and 15 kg of silver, and studded all over the car with diamonds, rubies, expensive gemstones and more precious stones
But, it's not for sale - the valuable and fully functional car is a unique branding and promotional initiative by Goldplus Jewellery, part of Titan Industries, a Tata Group company, an official use only.
The car incorporates beautiful designs, made with the precious stones of different colours, set on the gold and silver body of the car. he Goldplus Nano Car is billed as the world’s first ever gold jewellery car and celebrates the 5,000 years of jewellery manufacturing industry in India.
The car incorporates beautiful designs, made with the precious stones of different colours, set on the gold and silver body of the car. he Goldplus Nano Car is billed as the world’s first ever gold jewellery car and celebrates the 5,000 years of jewellery manufacturing industry in India.
“As many as 14 techniques of jewellery making have gone behind the effort — from the intricate filigree work to the delicate and colourful meenakari work, the stunning kundan to the traditional naqashi…marking the convergence of diverse and culturally distinct jewellery making techniques from around India,” the official told IANS.
Titan Industries managing director Bhaskar Bhat said that since eternity, jewellery made with gold and precious stones has been an integral part of the Indian woman’s life.
“Indian jewellery has been an epitome of innovation and creativity, and carved a niche worldwide for itself for the intricacy of the designs crafted out of the precious metals and stones,” said C.K. Venkataraman, COO, jewellery division.
The Goldplus Nano Car pales the average Rs.1.40 lakh Nano, which started with a Rs.1 lakh price tag at its launch. The car's body is made with 80 kg 22 carat solid gold, 15 kg silver, precious stones - including diamonds, rubies - and other expensive gemstones, the official said.
"As many as 14 techniques of jewellery making have gone behind the effort -- from the intricate filigree work to the delicate and colourful meenakari work, the stunning kundan to the traditional naqashi...marking the convergence of diverse and culturally distinct jewellery making techniques from around India," the official told IANS.
Titan Industries managing director Bhaskar Bhat said that since eternity, jewellery made with gold and precious stones has been an integral part of the Indian woman's life.
"Indian jewellery has been an epitome of innovation and creativity, and carved a niche worldwide for itself for the intricacy of the designs crafted out of the precious metals and stones," said C.K. Venkataraman, COO, jewellery division. The car incorporates beautiful designs, made with the precious stones of different colours, set on the gold and silver body of the car.
"Indian jewellery has been an epitome of innovation and creativity, and carved a niche worldwide for itself for the intricacy of the designs crafted out of the precious metals and stones," said C.K. Venkataraman, COO, jewellery division. The car incorporates beautiful designs, made with the precious stones of different colours, set on the gold and silver body of the car.
There isn’t much empirical evidence to make one believe that the decade long gold rally has exclusively to do with either realized inflation, inflation expectations or the federal reserves balance sheet. However, based upon our previous post about the macro exposure obtained by buying/selling gold, thinking of gold simply as a hedge for inflation may miss the bigger picture. The fundamental reason gold has value is that it is an alternative to paper currency, and what makes gold attractive to hold vs. a paper currency is what it yields on a real basis. While high inflation rates might be one variable that goes into determining whether a currency is attractive to hold, it is likely not the whole picture. It is key to understand that the exposure you obtain from buying/selling gold is not exclusively linked to the inflation rate. Buying gold now is the lowest risk investment you can make. And the upside is a once-in-a-lifetime opportunity.
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