All that glitters is not gold, so warned Shakespeare and several other writers in a famous statement of the obvious. If all that glittered was gold, the metal would not be as sought after as it has been through the ages. Its scarcity value primarily determines its demand, though not just that alone. Economics values such a commodity depending on three questions. Is it a unit of account? A medium of exchange? And a store of value?
These criteria are rarely satisfied nowadays. Certainly, not the currencies we use in our daily exchange. There was a time when currencies were made of gold but that practice fell out of use and such gold coins today are collectors’ items.
Even the link to gold of major currencies like the US dollar has been broken. Nowadays no central bank undertakes to pay the holder of a dollar a certain amount of gold. The Gold Standard ended decades ago. And so did the Dollar Exchange Standard which succeeded it.
While gold was the ultimate unit of account, such that it was the greatest compliment to say that someone was worth one’s weight in gold, it is not so nowadays. Nor is gold any longer a medium of exchange used to finance transactions. The end of the standards just referred to saw to that.
This notwithstanding, gold is, if anything, more popular than ever before. If “all the gold in Fort Knox” is a hyperbole which now has passed its time, and no central bank backs its country’s currency with gold, using the major paper currencies as reserve assets instead, practically all central banks will have some or much gold among their reserves.
We were reminded of that in an unlikely manner when the earth-shaking uprising in Tunisia led to a rumour that the incredibly corrupt second wife of former despot Zine El Abidine Ben Ali had gone to her country’s central bank and demanded that they give her one and a half tons of gold. The rumour did not exaggerate Mrs Ben Ali’s avariciousness – she and her family, as well as her husband’s family, applied no bounds to their greed.
But, though it may have been correct in attributing intent, the rumour was not actually correct. One of gold’s limitations is that, attractive though it is, it is not easily transportable in large quantities.
That has not been a limiting factor on gold’s major attribute. It is a store of value unparalleled in its efficacy and thereby in its attraction to investors large and small. In countries like India its major use is decorative. Not unlike us, especially a few years back, Indian men like their women decked out in gold. The demand for gold for personal use in the ultimate decorative gold is huge. So is the demand for industrial purposes. The third demand – to keep gold for investment purposes – is not overshadowed thereby.
That demand has shot up rather than waned since the world went off the Gold Exchange Standard, and its price was liberalised. The market price of gold in its raw form has multiplied many times over. That trend strengthens at times of high inflation. Inflation erodes the value of paper money faster than a mouse nibbles at its bit of cheese, confirming their poor store-of-value quality.
The lack of a floor under currency values is to an extent compensated by the rate of interest payable on such currencies. The Swiss Franc, probably the world’s most consistent currency, maintains its strength despite the interest rate discount it tends to hold relative to other major currencies. The point remains, though, that inflation affects the demand for gold.
On one hand, it raises gold’s attraction because in such times more than ever the store-of-value aspect grabs investors’ notice. However, the opportunity cost in holding non-interest bearing gold is also taken into account and dampens investment demand.
Conversely, at times of low inflation and low interest rates, as we have been experiencing in recent years, the low interest opportunity cost of holding gold increases the metal’s pull. That is a major reason why gold has been on a steady upward trend for many months now.
That feature has been reflected in the local market in a novel manner. A market has developed in “used” gold. Various jewellers have been offering to buy gold items at the going price. Many holders of small gold items have been attracted by these offers, which show no sign of subsiding. Some jewellers warn that the practice could encourage stealing of gold items, since bought gold is quickly melted, destroying any proof of provenance. Serious jewellers safeguard against that by adhering to the requirement that sellers reveal their identity. But, such stringency does not always work.
The local “old gold” market does not mean that we have given up our liking for gold items. It does raise questions, though, about regulation or lack thereof; about whether sellers are getting a fair deal or not.
Cash has its attractions too and some sellers may not pay adequate attention to the fact that they do not understand the market as much as experienced dealers do. Such commercial demand for gold reflects the fact that there remains a demand for manufactured gold items. Such matching is natural. It does not do away with the desirability that the authorities pay more attention to how the market is working and also for them to provide some form of education.