Smit Bullion New.docx

BULLION MARKET

CHAPTER 1: INTRODUCTION

1.1Meaning and Design A bullion market is a place where precious metals such as gold, silver, platinum and palladium can be bought and sold. Typically, bullion is used for trade on a market. The word "bullion" comes from the old French word bouillon, which meant "boiling", and as the term for the activity of a melting house. Price depends on supply and demand. These two factors drive the underlying price which is then adjusted upwards or downwards depending on the form of the precious metal. Modern bullion markets allow small, individual investors all the way up large institutions to easily buy and sell precious metals. The value of bullion is typically determined by the value of its precious metals content, which is defined by its purity and mass. To assess the purity of gold bullion, the centuries-old technique of fire assay is still employed, together with modern spectroscopic instrumentation, to accurately determine its quality to ensure the owner receives fair market value for it. It is also weighed extremely accurately. Retailers may sometimes market ingots and bars of base metals, such as copper, nickel and aluminum, as "bullion", but this is not a widely accepted definition Trading in bullions market is open 24 hours. Bullion markets exist across the globe, and most of the transactions take place through electronic means or by phone. The versatile uses of silver and gold in many areas especially its industrial applications decide the prices of the precious metal. Bullions are considered as a safe bet to hedge against inflation or as a safe haven for investment. There are other avenues to invest in these markets such as exchange-traded funds (ETFs), which allow greater flexibility as far as safety and storage issues are concerned. There are a significant number of Gold ETFs available in the market, and the SPDR Gold Trust (GLD) is the most significant gold exchange-traded fund as of November 30, 2017. The primary disadvantage of trading in physical bullion is that it is difficult to store the metal, as there is always a risk of theft associated with it. A bullion market has a lot of active players like banks, fabricators, refiners, vault operators, jewelers, hedgers, arbitrageurs, and speculators, etc. The brokers also facilitate the transactions between parties of two different countries or places. Investing in gold has always been a traditional route for investing. The simple market mechanism for investing in gold is to invest when the price is low and sell the investment when the market is at high.

Bullions tend to move at an erratic pace and have different behavioral patterns when compared to the other market securities like equities and funds. This makes it a better bet for hedging and makes it a worthy asset. The bullion market is also subject to market fluctuations like any another market related security. Investors view bullion trading as a safe haven to hedge against inflation. The bullion market plays a pivotal role in the pricing of gold and silver ornaments all around the world. Bullion is the most widely traded form of the precious metals. Bullion refers to precious metal in the tradable form of bars, wafers, ingots, and coins. The minimum purity of the precious metal in bullion is 0.995. Bullion takes the shape of coins, bars and ingots. Prices are based primarily on the precious metal weight and content. Bullion coins are minted by a country, and are legal tender in that country (although unlikely to actually be used as currency). South Africa was the first country to mint bullion coins, with the Krugerrand. Bullion coins tend to be quite rare, many with mintages of less than 10,000. They have been minted since the late 1960s by a variety of countries, although most have been minted since 1980. They are designed to be bought and sold based on their metal content, not their face value. The London bullion market is the most globally traded market. It deals in gold and silver in futures, options and forwards contracts. The London Bullion Market Association oversees the operations of this bullion market, and it has set specific standards about the quality of the metals transacted. The London bullion market has over 150 members from 30 countries. These members derive majority of the revenue from Gold and Silver bullion trading.

1.2 History of Bullion Market Claude de Bullion, became the French Minister of Finance in 1632 under King Louis XIII. He was an extremely rich man and so great was his cash pile, extensive property holdings and business interests that the generic term of ‘Bullion,’ emerged after his name and which came to symbolise untold wealth. Monsieur Bullion was not a popular man in France and when he died, he was obliged to be buried at night time to avoid a baying mob. Even a hundred years later his reputation for excessive wealth had not diminished and during the French Revolution his tomb was sacked and destroyed. Gold has been traded for over two thousand years, and in particular, the Spanish traded gold and silver captured from their conquests in South America during the middle ages. So the trading of precious metals on the open market is nothing new, and now as in the past, their value is based on the purity, mass and weight of the commodities being marketed. These metals could be in the form of coins, ingots and bars. The purity of gold is defined by using a centuries old technique of fire essay (you can see essay marks on gold and silver bars, ingots and silver objet’d’art which provide origin, date and help value the item). Today, this old methodology is combined with a modern spectroscopic instrumentation to ensure perfect accuracy. The European Union regulates the purity of gold bullion (99.5% for gold bars) and (90% for bullion coins).

1.2 Purpose Bullion markets exist for two types of customers. The first type of customer is the producer of goods that require precious metals as inputs. These customers are jewelry and electronics manufacturers as well as many other companies in industries ranging from medicine to chemicals to glass. These companies are the main drivers of demand and the reason precious metals have any value. These companies participate in the bullion market so they can ensure a steady supply of precious metals to their manufacturing facilities. The second type of customer is the spectacular. These are people who buy precious metals because they think it will provide a hedge against inflation or that the price of the precious metal will increase because demand will exceed supply. While the first type of customer wants to take actual delivery of the precious metal, the speculator generally does not, which is why investment firms created precious metal derivative investments.

1.3 Physical Bullion Physical bullion represents the oldest type of bullion market. Ever since precious metals became valued, a market has existed for people to buy and sell physical bullion. Many individuals today buy gold coins or bars and keep them tucked away in their homes or safe deposit boxes as a hedge against inflation or the devaluing of our currency.

1.4 Investing Activity Bullion is the most affordable way to own precious metal. Bullion can reduce the volatility of a portfolio while adding significant profitability. Bullion survives and actually thrives on inflation. When economies falter and currencies become devalued, bullion tends to retain its value. The disadvantages of bullion can include short term fluctuations and a loss of privacy since forms are required upon sale. There is also a remote possibility for the government confiscation of gold bullion although this happened only once before in 1933. The specifications of bullion are often regulated by market bodies or legislation. In the European Union, the minimum purity for gold bullion, which is treated as investment gold with regards to taxation, is 99.5% for gold bullion bars and 90% for bullion coins. Investors may choose to purchase physical gold bullion for several reasons - to attempt to hedge against currency risks, inflation risks, geopolitical risks, or to add diversification to an investment portfolio.

1.5 Cost Factor Participating in bullion markets has its costs. Manufacturers enjoy economies of scale that allow them to defray the cost of purchasing and transporting the physical bullion to their warehouse or factory. Manufacturers are also able to pass on the cost of transportation to their customers through the products sold.

Investors or speculators on the other hand have to contend with various buying and selling costs depending on the type of investment they choose. If they choose to receive physical bullion into their own possession they have the cost of transportation and security that adds a significant premium to their price and requires a significant discount when they sell. If an investor uses a firm that stores it for them then he will have to pay both a buying or selling commission plus an annual storage fee that is usually a percentage of the value of the bullion stored. The cheapest way for an individual investor to participate in the bullion market is through exchange-traded funds.

Chapter 2: Research Methodology

2.1 Research Work  The data is collected through primary as well as secondary source.  30 Google forms were distributed to gold and silver buyers and investors for responses.  Secondary data is collected through books, journal, magazines and Wikipedia.

2.2 Objectives of Study  To understand the scope of bullion market.  To analyze the trends in bullion market.  To study the present bullion market users.

2.3 Gold through ages The history of gold begins in remote antiquity. But without hard archaeological evidence to pinpoint the time and place of man's first happy encounter with the yellow metal, we can only conjecture about those persons, who at various places and at different times first came upon native gold. Experts of fossil study have observed that bits of natural gold were found in Spanish caves used by the Palelithic Man about 40,000 B.C. Consequently, it is not surprising that historical sources cannot agree on the precise date that gold was first used. One states that gold's recorded discovery occurred circa 6000 B.C. Another mentions that the pharaohs and temple priests used the relic metal for adornment in ancient Egypt circa 3000 B.C. However, it is curious to note that the early Egyptian's medium of exchange was not gold but barley. The first use of gold as money in 700 B.C. is claimed by the citizens of the Kingdom of Lydia (western Turkey). Surely, you remember the kingdom of the famous fortune seeking King Croesus - circa 550 B.C.

Chapter 3: Literature Review Review of literature of a subject is helpful in understanding the conceptual framework and provides a detailed account of work which was done in the past on that particular subject. It proves helpful to the candidate in deciding the line of action to start his research study. Keeping in view all these facts a review of existing literature has been made by the researcher.

Dr. Shefal Dani and Riddhi Ambavale, in their study found that Gold and Silver are the most popular metals in India. Investors do invest in Gold and Silver with their other investment alternatives like stocks, mutual funds, real estate property and the like. The research is that before the year 2006,investors regularly make investment in Gold and Silver but they reduce their investment in such metals as the prices of Gold and Silver are at hike peak for the year 2007 and they have choose other options from the investment. In Silver, coins of silver are most popular among the investors. For giving bonus or appreciation on gift to the employees of the organization on special days. From their study of the investors’ preference on investment in Gold and Silver by conducting research through questionnaire, we came to know that investors do invest in gold and silver depend on their income and savings with them.

Chapter 4:Data Analysis and Interpretation Around 30 investors of different age groups were asked few questions to find out how many of them invest in Bullion Market and the factors they consider while investing in a security. The findings of the survey are given below:

1: Income Per Year:

INCOME (annual) 7% 17% Less than 2,00,00

2,00,000 to 5,00,000 46%

More than 8,00,000

While interview of 30 investors was taken, 14 of them had an annual income between RS.3,00,000 to Rs.6,00,000. This was carried out to figure out the income of the investor because as the income of an investor increases he becomes keen to invest more to get high returns

2. How much percentage of your income do you invest:

PERCENTAGE OF INCOME INVESTED

17% 33% Less than 20%

20% to 40%

above 40%

People with high income tends to invest more of their total income and people with low income invest less. So 50% of people invest 20%-40% of their income in various securities. This investment may be done due to various reasons such as to park their money, for capital appreciation, to get high returns etc.

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3. Objective of the investment done by the investor:

INVESTMENT OBJECTIVE

17%

23%

Income

20% 40%

Income as well as appreciation Capital protection

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The objective of the majority of the investor is to get good income as well as capital appreciation, 12 out of 30 investors had an objective of capital appreciation as well as income whereas hardly any of investor invests for capital protection.

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4. Where would you like to invest your income:

WHERE WOULD YOU LIKE TO MAKE YOUR INVESTMENT

11% 11%

28%

Bullion market Equity

Bank deposits

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Majority of the investors had an objective of high returns on their investment and they preferred investment in Equity over investment in Bullion Market. Then followed Bullion market with 8 out of 30 investors whiling to invest their income.

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5. If you invest in Gold then in which form you would like to hold Gold in:

FORM IN WHICH INVESTOR WOULD LIKE TO HOLD GOLD

10%

23%

Gold Mutual Funds Gold ETFs Physical Jewellery Gold Bullion 37%

Most of the investors having Gold as their investment alternative invested their income in physical jewellery or Gold Exchange Traded Funds. . ETFs may be attractive investments because of their low costs, tax efficiency, and stocklike features.

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6. What factor according to you affects the prices of gold:

FACTORS AFFECTING PRICES OF GOLD

23% 30%

7% Speculation Demand and Supply Government Policies

Inflation 40%

Most of the investors believed that prices of Gold changed due to the demand and supply of the commodity. 9 investors out of 30 considered speculation as the reason for the rise in prices of Gold while others believed that inflation and changes in Government policies was the reason for it.

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Chapter 5:Conclusion  50% of people invest more than 20% of their income.

 The investment objective of most investors is to gain income as well as appreciation.

 Very few invest their income for the protection of their capital.

 People have started investing in Gold ETFs due to low costs, tax efficiency, and stock- like features.

 Price of Gold mainly depend upon the demand and supply factor

 Internationally trading in Gold has given the investors very safe and very fruitfull option. Today people who earlier feared from entering the market are investing in Gold as it is the most safest asset and also its price is less fluctuating

 The reason may be any but today people are willing to invest in Gold rather than Stock.

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CHAPTER 8 : INDIAN BULLION MARKET ASSOCIATION 8.1SIZE India is the leading consumer and importer of bullion. It consumes nearly 800 MT of gold, which accounts for 20 per cent of world gold consumption. Out of this, around 600 MT of gold goes into making jewellery.

The domestic bullion and jewellery market is estimated to be around US$ 16.1 billion, which is expected to grow to the size of US$25 billion within 2-3 years.

India‟s gem & jewellery sector commands around 80% of the jewellery trade worldwide. Total Export of jewellery in April 2009 was at Rs.5749.56 Crore.

The Indian gems and jewellery industry is one of the fastest growing segments in the Indian economy. The annual growth rate is approximately 15 per cent.

Gems and jewellery worth US$ 17.79 billion was exported during April 2008 to February 2009. The United Arab Emirates (UAE) was the largest importer of gems and jewellery from India in 2008-09, with a share of 31 per cent. This was followed by Hong Kong with 25 per cent and the US with 20 per cent. The gem and jewellery sector accounted for 13 per cent of India‟s total merchandise exports.

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8.2ISSUES FACED BY IBMA



Though India is the leading player in import and trade in bullion and export of jewellery, it does not exert any significant impact in discovery of gold prices in the

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international market. The reason is that country‟s bullion trade is fragmented and unorganized.



During recent times, Bullion market has witnessed high degree of volatility in prices, mostly due to fluctuation in international market and factors influencing dollar valuation. This has severely affected the bullion and jewellery trade in India, as demand for ornaments as well as bullion usually comes down if the prices are volatile.



Export of Indian gold bar is not allowed. This creates a disparity in Indian gold price and international prices, if the international price goes above a certain level. It creates a distortion in physical trade, which in turn severely affects import of gold in India.



Most of other commodities and merchandise are under OGL, where both import and export of commodity is allowed without any hassle. But, in case of gold and silver, there are a number of restrictions on import as well as export of gold.



Price of gold and silver differ from place to place in India even at the same moment. There is no benchmark price available, which is valid for the entire country.



There is no national level trade and industry body, which can represent the bullion trade and industry.

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

India has huge household stock of gold and silver. In past, there have been multiple attempts by the Government to bring out such assets into mainstream, but none of the schemes could achieve the desired results. There is need to create a market linkage for such household bullion stock, which can be refined / certified by approved refineries so as to ensure purity and weight. This would induce the people to bring out such gold into open whenever International gold prices rise beyond a level in order to take advantage of rising prices.

8.3Genesis of IBMA

In order to solve the issues faced by the bullion trade and industry, National Spot Exchange in association with the leading bullion dealers of India have endeavored to set- up Indian Bullion Market Association or IBMA.

8.4Vision Statement To create a national level forum for India‟s bullion trade and industry and to organize Indian bullion trade as a unified, structured, credible and transparent market discovering the benchmark Indian spot price through the pan India electronic network created by National Spot Exchange.

8.5Mission The mission is to create a business model, which serves the fundamental requirements of Indian bullion trade and industry in a sustained manner. It proposes to achieve this mission through a partnership approach, where the success and growth of business is to be shared equally by and between all stakeholders. It is based on an integrated approach, where the leading bullion dealers of the country stand together with National Spot Exchange to initiate a golden chapter in the history of gold in India.

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8.6Objectives The objectives of promoting IBMA are: 

To set up a national level trade association for representing bullion importers, dealers, traders, jewellery merchants, ornament dealers, exporters, bullion banks, nominated agencies, investors, consumers, refineries and all stakeholders connected directly or indirectly with the bullion trade and industry.



To identify the problems faced by various stakeholders connected with bullion trade and industry and to find out likely solution to such problems for achieving overall growth of bullion trade and industry.



To interact with the Central Government, State Governments, RBI, nominated agencies, banks and other regulators for submission of impartial views relating to bullion trade and industry and to have consistent follow up regarding major policy initiatives, budget proposals, import and export policies, announcements relating to import duty, VAT and other issues, which may directly or indirectly impact the bullion trade and industry.



To set up the process for approval of local refineries and domestic brands of gold and silver bars and to make them tradable on National Spot Exchange platform.



To introduce a system of sale of gold coins and silver coins made by local refineries and domestic brands so as to stimulate an investment cult among millions of investors in gold and silver in smaller denomination and at reasonable price.



To create linkages between domestic stock of gold and silver, recycled gold and silver and to remove disparity between domestic prices and international prices.



To notify the benchmark prices for Gold and Silver in terms of AM and PM fixing.



To promote savings and investments in gold and silver and to evolve a system of seamless trading, investment, vaulting, electronic record keeping, dematerialization and other value added services.



To notify a code of conduct and ethics to be followed by bullion dealers, jewelers and traders and to develop and promote good trade practices and integrity so as to enhance overall reputation of bullion trade.

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5.8 BULLION IN INDIA India is the leading consumer and importer of gold in the world. Due to this, the potential of the India bullion market is very promising. Owing to the weak price of Dollar in the global market, the price of bullion is soaring. The gem and jewelry industry of India is one of the fastest growing sectors of the economy at an approximate rate of 15%. The India Bullion market is under the strict supervision of the Government as bullion is one of the major indicators of the wealth of the country.

There are a number of restrictions imposed on the import and export of gold as compared to any other commodities. The bullion market of the country is very fragmented and unorganized. The price of bullion varies very much in different parts of the country. The main reason for this is the lack of a benchmark that is valid throughout the country. India is the largest investor in gold jewelry as a large number of people believe that investing in gold is beneficial. The domestic consumption of gold depends on factors like the wedding season, festive season, the performance of the harvest and the monsoon of the country.

Country

Bullion (in tons)

United States 8133.5 France

2445.1

Germany

3408.5

Italy

2451.8

Netherlands 612.5 Switzerland

1041.5

ECB

501.4

India

557.7

Russia

568.4

Japan

765.2

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China

1054.0

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CHAPTER 6 : GOLD EXCHANGE TRADED FUND ( ETF)

A Gold EFT is an exchange traded fund with gold being the principle and only commodity being traded. When you "buy gold" via a GOLD ETF it is very different to the general practice to buy and sell gold which most people are familiar with. Exchange traded funds (ETFs)were first introduced on the Toronto, Canada, Stock Exchange around the early '90s. They were then introduced in to the US and other markets during the 90s.

A simplified definition would be: An exchange traded fund has funds and stocks in one product and trade is made on the particular fund. Prior to ETFs, stocks and funds, were traditionally kept separate to reflect liquidity issues.

The purpose of an ETF is to be able to invest in the growth of an industry or even commodity that was not easily available to the market prior to ETFs.

6.1GOLD ETF AN EMERGING INVESTMENT OPTION For India investment in Gold is not a new concept. Using the gold to hedge the future risk is our centuries old practice. With the change in time the form of investment in gold has also changed, and one of such forms is GOLD ETF. An exchange-traded fund (or ETF) is an investment fund traded on stock exchanges, like stocks. An ETF holds assets such as stocks or bonds and trades at approximately the same price as the net asset value of its underlying assets over the course of the trading day. ETFs may be attractive investments because of their low costs, tax efficiency, and stock-like features. Investment in metals for hedging and speculation is a common practice. Among all the metals gold is recognized as the most precious one. Due to the precious nature of gold and the characteristic of non deterioration investors among the world have attracted towards this fantastic form of investment. Like other commodities the price of gold is also driven by its demand and supply. Thus investment in physical gold cannot be immune from the cost, and storing cost is one of such costs. The storing cost associated with physical gold can be nullified by investing in

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Gold ETF. The concept of gold ETF was first proposed by Benchmark Asset Management Company Private Limited. It is a Mumbai based mutual fund house. In May 2002 Benchmark asset management

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company private limited filed a proposal with the SEBI, but it did not receive the approval. After Ten months in March 2003 the gold exchange trade fund was launched on the Australian stock exchange, under Gold Bullion securities and recognized as the pioneer gold ETF. Later, on 19 March 2007 Benchmark asset management company private limited launched Gold Bees on National stock exchange of India. Other gold ETFs available on National stock exchange of India are Kotak gold, Goldshare, Relgold, Quantum gold and Sbi gets. Investment in gold ETF can be a good long term investment as it remains high against inflation. As per the data from Association of mutual funds, the new inflow into gold in 2009-10 touched Rs. 804 crore as against Rs. 600 crore in equities. At the time of global depression and economic slow down, gold can be a secure investment option. Similarly the benefit of portfolio diversification can be enhanced by keeping gold in the portfolio. During last Two years, we witnessed that all the asset classes have to failed to perform, even in such a situation gold performed well. Gold can be a strong hedge against dollar and inflation. From taxation point of view gold ETF is taxed as per debt mutual fund taxation rules. Similarly investors investing in gold ETF are not liable to pay wealth tax. Thus an investor can ensure tax benefit by investing in gold etf. While choosing the gold etf, the investor should consider and compare the expense ratio of all the existing gold etfs and choose one with lower expense. Similarly the liquidity test is equally important for this fund having good volume be selected. The average volume of different gold etfs on 19 April 2010 is provided hereunder.

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6.2Returns

The 35 per cent return that gold has delivered in the last one year and 170 per cent absolute return in the last five years is not par for the course. In the period 1970-1982, gold prices had a compounded annual growth rate (CAGR) of around 21 per cent while inflation grew by 14.1 per cent over the same period. But in the following 23 years, inflation grew by 7.6 per cent while gold prices grew by 7.78 per cent.

Over the long term the realistic returns from gold would just beat inflation. Factor in entry loads (a high 2.5 per cent for UTI-Gold) and annual fund management costs of 1 per cent or more, and the returns are not appealing, though the costs are expected to come down in the long run.

However, in the short and medium term investment in gold can be very rewarding considering

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that the prices have come off the highs quite a bit and the indicators all point to a revival in the price rally.

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Further, global demand for gold is 1,000 tonnes more than supply. With no new mining capacity coming through, most of the gold is being recycled. Inflationary pressures in the world economy are positive drivers of gold prices. The central banks of Russia, China and West Asian countries are giving strong buying support to gold prices.

Gold prices could also go up due to demand from gold ETFs, as they did in the London Stock Exchange in 2004. Investing in gold requires constant evaluation of international developments especially of crude oil prices, unfavourable geopolitical developments and the strength of the US dollar.

Gold ETFs are passively managed funds and, hence, not geared to exploit positive or negative trends. However, the investor can vary portfolio allocation to gold ETFs to take advantage of these trends.

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Chapter 12:ANNEXURE (QUESTIONNAIRE) NAME OF THE RESPONDENT:

1. Income per year: o Less than 3,00,000 o 3,00,000 to 6,00,000 o 6,00,000 to 10,00,000 o More than 10,00,000

2.

How much percentage of your income do you invest : o Less than 20% o 20 to 40% o 40 above

3. What is your investment objective: o Income o Appreciation o Income as well as appreciation o Capital protection

4. Where would you like to invest: o Bullion market o Equity o Debt o Bank Deposits

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5. Which form would you like to hold gold in: o Gold Mutual Funds o Gold ETFs o Physical Jewellery o Gold Bullion

6. What factor according to you affects the prices of gold: o Speculation o Demand Supply o Government Policies o Inflation

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CHAPTER 7 : GOLD STANDARD – RISE AND FALL

7.1The Rise of the Gold Standard The gold standard is a monetary system in which paper money is freely convertible into a fixed amount of gold. In other words, in such a monetary system gold backs the value of money. Between 1696 and 1812, the development and formalization of the gold standard began as the introduction of paper money posed some problems. In 1797, due to too much credit being created with paper money, the Restriction Bill in England suspended the conversion of notes into gold. Also, constant supply imbalances between the gold and silver created tremendous stress to England's economy. A gold standard was needed to instill the necessary controls on money. By 1821, England became the first country to officially adopt a gold standard. The century's dramatic increase in global trade and production brought large discoveries of gold, which helped the gold standard remain intact well into the next century. As all trade imbalances between nations were settled with gold, governments had strong incentive to stockpile gold for more difficult times. Those stockpiles still exist today. The international gold standard emerged in 1871 following the adoption of it by Germany. By 1900, the majority of the developed nations were linked to the gold standard. Ironically, the U.S. was one of the last countries to join. (A strong silver lobby prevented gold from being the sole monetary

standard

within

the

U.S.

throughout

the

19th

century.)

From 1871 to 1914, the gold standard was at its pinnacle. During this period near-ideal political conditions existed in the world. Governments worked very well together to make the system work, but this all changed forever with the outbreak of the Great War in 1914.

7.2The Fall of the Gold Standard With the Great War, political alliances changed, international indebtedness increased and government finances deteriorated. While the gold standard was not suspended, it was in limbo during the war, demonstrating its inability to hold through both good and bad times. This created a lack of confidence in the gold standard that only exacerbated economic difficulties. It became increasingly apparent that the world needed something more flexible on which to base its global economy. At the same time, a desire to return to the idyllic years of the gold standard remained strong among nations. As the gold supply continued to fall behind the growth of the global economy, the British pound sterling and U.S. dollar became the global reserve currencies. Smaller countries began holding more of these currencies instead of gold. The result was an accentuated consolidation of gold into the hands of a few large nations.

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The stock market crash of 1929 was only one of the world's post-war difficulties. The pound and the French franc were horribly misaligned with other currencies; war debts and repatriations were still stifling Germany; commodity prices were collapsing; and banks were overextended. Many countries tried to protect their gold stock by raising interest rates to entice investors to keep their deposits intact rather than convert them into gold. These higher interest rates only made things worse for the global economy, and finally, in 1931, the gold standard in England was

suspended,

leaving

only

the

U.S.

and

France

with

large

gold

reserves.

Then in 1934, the U.S. government revalued gold from $20.67/oz to $35.00/oz, raising the amount of paper money it took to buy one ounce, to help improve its economy. As other nations could convert their existing gold holdings into more U.S dollars, a dramatic devaluation of the dollar instantly took place. This higher price for gold increased the conversion of gold into U.S. dollars effectively allowing the U.S. to corner the gold market. Gold production soared so that by 1939 there was enough in the world to replace all global currency in circulation.

As World War II was coming to an end, the leading western powers met to put together theBretton Woods Agreement, which would be the framework for the global currency markets until 1971. At the end of WWII, the U.S. had 75% of the world's monetary gold, and the dollar was

the

only

currency

still

backed

directly

by

gold.

But as the world rebuilt itself after WWII, the U.S. saw its gold reserves steadily drop as money flowed out to help war-torn nations as well as to pay for its own high demand for imports. The high inflationary environment of the late 1960s sucked out the last bit of air from the gold standard.

In 1968, a gold pool (which dominated gold supply) which included the U.S and a number of European nations stopped selling gold on the London market, allowing the market to freely determine the price of gold. From 1968 to 1971, only central banks could trade with the U.S. at $35/oz. Finally, in 1971, even this bit of gold convertibility died. Gold was free at last. There was no further reason for central banks to hold it.

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Summary While gold has fascinated humankind for 5,000 years, it hasn't always been a guarantee of wealth. A true international gold standard existed for less than 50 years (1871 to 1914) - in a time of world peace and prosperity that coincided with a dramatic increase in the supply of gold. But the gold standard was the symptom and not the cause of this peace and prosperity.

The events of the Great War changed the political, financial and social fabric of the world - the international gold standard would be no more. While a gold standard continued in a lesser form until 1971, the death of it had started centuries before with the introduction of paper money - a much more flexible instrument for our complex financial world.

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Note the gradual decline of the central banks' reserves since the fall of the gold standard. As this decline continues, the price of gold also faces a continual downward stress. Sixty percent of the current gold reserves are held by U.S., Germany, France, Switzerland and Italy. Data provided by the World Gold Council.

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