Recently rising gold prices might seem to indicate a better investment option and many investors have projected the rise to continue further. But none of them are sure as to when and how the gold bubble will burst and murk the investment and economy.
Irrespective of the prophecies made against gold investment, an inevitable belief says that the rise in gold prices may not last long and there is always a threat ragging - What if the gold prices go down? What repercussion may it cause?
The economists and investors gave multiple reason for this hike such as India-China border issue and COVID-19 pandemic. However, if we look with a broader perspective the parameter seems vague enough to discard the logic behind it.
Since these border tensions and pandemic are not likely to prevail for long gives a reason why investment in gold can bring only short term results.
China will never prefer to stir the World giving one more chance after Corona otherwise it has to face a global restriction at last. Moreover, a wider known fact is Chinese companies are facing a tough time as they have been banned turning it into huge financial loss.
However, China is smarter than what the World thinks about it. They might take various financial measures to respite their country and venture. They have proved it earlier. Since past few years, they have been very significantly overcoming the economic depression. Invariably, the incidents prove that China might infuse gold reserves or foreign reserves in market due to which the gold price will drop itself. Then can there be a paradigm shift observed.
Moreover, the Indian government might take some preventive measures related to gold import and bring certain changes in the policy that restricts buyers to have only certain amount of gold. This situation can worsen when the gold loan companies sink. Since gold loan is a risky business and companies provide only 80% amount against its mortgage, the chances of survival rises.
Unlike other sovereign bonds there is no security measure in gold loan and companies’ deal merely on a 20% margin. The rampant cases of gold smuggling is a clear indication that some of daredevils find it more attractive to deal even if it is illicit.
Besides, Indian Gold Council states that 70-80% of imported gold is not in use and only 20-30% of gold is actually determining the prices. The reason is simple as most of the gold has been already hoarded and does not have any direct contribution in the economy. Similarly, out of the total gold received by the religious institutions only 4-5% is in use and rest remains unproductive. Government’s gold monetization scheme is focused upon to bring this unproductive economic source back into the economy for public welfare. If recalled, back in history during a war with China these religious institutions lent the gold ornaments to government for their military requirement. However, after the end of war the Government returned the gold bars. Religious institutions raised their fury and blamed government for fiddling with public sentiments.
The biggest challenge that government has to face is to control the fluctuation in gold prices and secure the economy from any financial shock. On another hand, to bring more and more gold in economic use is a next big thing that has to be taken care of. However, unsure of future the yellow material remains behaving like free market or crypto currency that is left to be regulated in a better way.
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