USD REPLACING GOLD AS CURRENCY OF LAST RESORT

Gold and silver started off the week with little movement but coming Tuesday they both bounced back. The rally in bullion was inline with the rise in other commodities rates and U.S stock markets. Since the U.S markets were closed on Wednesday there was not much movement in the commodities markets. 
SPOT MARKET gold prices traded close to $1610 an ounce for most of Tuesday morning in London, after breaking through the $1600 mark during the earlier Asian session. Silver prices touched $28 an ounce for the first time in nearly two weeks, while stocks and commodities also gained after disappointing US manufacturing data led to renewed speculation that the Federal Reserve might launch a third round of quantitative easing, known as QE3. 

However, precious metals saw a decline post The Wednesday close.

Gold and silver prices declined following the ECB decision to cut interest rate by 0.25pp to 0.75% and deposit rates from 0.25% to zero. This news also adversely affected the Euro/USD. Moreover the growth in the US economy was seen at a much slower pace
Comex gold futures prices ended the U.S. day session modestly lower on Thursday in choppy trading. The sharply higher U.S. dollar index pressured the precious metals as did traders being in a bit of a “risk-off” mentality. Dollar`s rally of more than 1 percent on Thursday`s session, the biggest daily rise in nearly eight months. Unemployment claims reduced to 374K as compared to a forecast of 385K which showed positive signs in US job market though the Unemployment rate remained unchanged at 8.2%.
The wave of monetary decisions announced by major central banks sparked Fears in markets regarding the outlook for the global economy, which in turn triggered a sell-off in commodities and shares as investors resorted to safe haven assets, especially the U.S. dollar and yen.
In the physical market, demand is still lagging on lackluster buying from Asian countries. Bullion rates might continue to zigzag from gains to losses and basically move in the same direction as the major currencies pairs including Euro/USD.  


A stronger dollar can hurt demand for metals and other commodities by making them more expensive in other currencies.  Further, a stronger dollar detracts from buying of gold as a sort of alternative currency, and vice-versa.

RBI MIGHT BAN BANKS FROM SELLING GOLD COINS

Akshaya Tritiya, Diwali or Dhan teras….Banks will no longer give importance to these days for sale of gold coins.

RBI is considering banning banks from selling gold coins.

A central bank source argues that imports of Gold Bullion are exacerbating the Rupee's weakness against the Dollar, making a case for ending Gold Coins sales by banks. Banks were allowed to sell Gold Coins following a relaxation of rules on commodities trading aimed at sterilizing Dollar inflows, which saw the Rupee appreciate in the years before 2008. With the rupee depreciating 30% since August, and hitting a new low this week, at 57.16 to a dollar, the apex bank is looking to reverse the trend. At a recent meeting, bankers have been advised to go slow on gold coin sales.

India is the world leader in Gold consumption. Gold is seen as a safe haven for parking money given the present gloom in the financial markets. A bulk of its demand is met through imports which are putting stress on the current account deficit and the value of the rupee.

As per Government of India, Gold as an investment has 2 issues. Firstly, the investment is non-productive as gold is hardly used in industrial production and it has contributed to the high current account deficit of the country. Secondly, the foreign exchange reserve that is used to import gold reduces the availability of this resource to finance the import of other commodities.

Gold’s share in total import bill of the country has gone up from 8.1 per cent in 2001-02 to 9.6 per cent in 2010-11. The percentage share of gold and silver combined has risen from the 3^rd most imported commodity in 2000-01 to the 2^nd most imported commodity in 2010-11 behind only crude oil.

RBI wants to generate immense awareness amongst people to switch to other modes of investment. However, Some experts believe the RBI's attempt at market manipulation will merely increase the black market gold prices and speed up the decline of the Rupee when compared to other assets like gold and silver.

Rather than implementing new modes for curbing imports, the Government should promote Bullion export in the country as it does for the jewellery. When Bullion is exported, an extra 1.5% value charge is levied by the government on the exporters. Moreover to redeem Duty, the exporters have to pay around a percent to the banks. If a provision is created in this case, then we could see an increase in Forex reserves by the exports. Research & development is the key to the future of Indian bullion industry. India holds around 9% of the global gold reserves estimated at 14,000 tonnes but fails to generate wealth out of it due to weak investment in exploration and mining activities. As we know, India is one of the leading consumers of gold and could challenge the likes of China and South Africa in gold production provided the right policy decisions and enabling environment for gold exploration and mining is put in place.

Indian households have nearly 25,000 to 30,000 tonnes of Gold. Government should show an effective way to gain revenue by exporting it. Schemes like minimum tax scheme should be introduced wherein an investor is charged minimum tax to convert his/her unaccounted gold into an accounted one. By this the government treasury will also increase and the idle gold can be put to use. The other scheme can be a VDS scheme (voluntary disclosure scheme) by which the Gold /Silver can be brought to the market. Such ideas will have a win - win situation for all.

However, if this ban is imposed then, one person who will surely benefit with this action is the “common man”, as gold coins will become cheaper. Usually people who buy gold coins from banks are charged a margin on around 3% if this ban is imposed then customers will start buying from the bullion dealers and other jewelers who don’t charge such high margins. Hence coins will be available to them at comparatively low rates.

However this move is still in its planning stage and no decision has been taken so far.