Lecture Notes: The Rise of Gold in the Global Economy

Introduction

• Importance of Gold in India
  • Indian households & temples hold around 20,000 metric tons.
  • India is the second largest gold consumer globally.
  • Comparison of India's gold holdings to other countries:
    • US: 8,100 tons
    • Russia: 2,332 tons
    • Other countries combined: less than India

Recent Economic Trends

• Indian stock market hit $5 trillion
  • Sensex returns: 8.33%
  • Nifty returns: 99.92%
  • Gold price increase: 16.16%
  • Gold prices at historic highs (above 70,000 rupees)
• Global trend: Central banks buying gold
  • India: 100 tons
  • China: 314 tons
  • Poland: 130 tons
  • Singapore: 125 tons
  • Czech Republic: 75 tons

Reasons for Central Banks Buying Gold

1. Historical Importance of Gold

   • Gold as a trusted commodity for centuries.
   • Post-World Wars economies and the Treaty of Versailles.
   • The British economy and rising debts.
   • US economy boom during World Wars via supply of goods.
   • Establishment of the Bretton Woods Agreement in 1944.
   • US dollar pegged to gold ($35 per ounce).
   • Trust in US dollar for international trades.
   • Formation of the World Bank and IMF.

2. US Dollar and Oil

   • 1945 US-Saudi Arabia oil deal.
   • Dollar as common currency for oil trade.
   • Importance of dollar in global trade.
   • 1970s US economy crisis: suspension of gold convertibility.
   • Rise of the US dollar backed by oil.
   • Countries hold US Treasury bonds (e.g., Japan, China, India).

3. Recent Shifts in Global Economy

   • Russia-Ukraine war: US freezing of Russian assets.
   • China's worry: risk to $797 billion in US Treasury bonds.
   • China and other countries: increased gold purchases post-2022.
   • Historical shifts in reserve currency market share (USD: 75% in 1970 to 59% in 2022).

4. US Money Printing and Inflation

   • Historical instances of US money printing (2008, 2020, 2021).
   • Consequences: global inflation and currency devaluation.
   • Countries buying gold to preserve value.
   • Limited availability of gold ensuring its value.

5. Consumer Demand and Market Sentiments

   • India: cultural affinity and wealth preservation.
   • China: real estate bubble and stock market stagnation.
   • Gold purchases as a safe investment amidst market uncertainties.
   • Investor sentiment during economic downturns affecting gold prices.
   • Inflation leading to increased gold purchases.

Conclusion

• Gold's increasing importance due to:
  • Protection against inflation and financial risks.
  • Long-term value preservation.
  • Global political and economic shifts.
• Investment advice:
  • Regular and gradual investment strategy
  • Avoid sudden market-based reactions.
• Gold remains a strong investment option but should be approached with caution.