Silver Precious Metals Investment Money Store of Value Silver Standard Legal Tender Developed Countries United States

INTRODUCTION
India needs to sustain an 8% plus economic growth rate, over the next two
decades, if it is to eradicate poverty and meet its human development goals. With
high economic growth rates and over 15% of the worlds population, India is a
noteworthy consumer of energy resources. Despite the global financial crisis,
Indias energy demand continues to rise.
Gold has been a valuable and highly sought-after precious metal for coinage,
jewellery and other. International gold prices have risen almost unabatedly in the
last few years, though there was one large correction in 2008. The impact of the
rise in international gold prices is reflected in its domestic prices as well. Despite
the sharp recent price rise, in India, demand for gold has sustained, not only as a
component of safe savings but also due to its social and cultural importance.
Therefore, movements in gold prices in India are of keen interest to all segments of
the society including investors.
Silver, like other precious metals, may be used as an investment. For more than
four thousand years, silver has been regarded as a form of money and store of
value. However, since the end of the silver standard, silver has lost its role as
a legal tender in many developed countries including the United States.
INTERNATIONAL PRICE MOVEMENTS

GOLD
In the long-run, whereas international gold prices could move as a hedge against
inflation, in the short-run there are large swings as a result of substitution of risky
financial assets.
Empirical results reveal that for the period 1991 to 2001, stock price, world price
index and US$ effective exchange rate turned out to be the most important factors
affecting the long-run movements of the international gold long-run, gold acts as a
hedge against inflation as the rise in world price level is accompanied by a rise in
international gold prices. With the rise in stock price index, there is a fall in
international gold prices. Similarly, with the strengthening of US dollar exchange
rate (Dollar Index, DXY), there is a fall in international gold prices.
When the similar relationships were estimated for the sample period 2003 to 2011,
there was deterioration in the performance of the relationship. In the long-run
relationship, impact of only world price index turned out to be statistically
significant and impact of the other variables turned out be either having adverse
sign or of much less relevance. Up to 2003, stock prices, world inflation rate and
US dollar rate used to be major factors causing changes in the international gold
prices. From 2003 onwards, world price level has impact on the international gold
prices, and in the short-run only US dollar rate has a limited impact. Perhaps the
unabated rise in the international gold prices since 2003 which have further gained
pace in recent months are a result of panic buying which cannot be
encompassed in these empirical analysis.
SILVER
Like most commodities, the price of silver is driven by speculation and supply and
demand. Compared to gold, the silver price is notoriously volatile. This is because
of lower market liquidity, and demand fluctuations between industrial and store of
value uses. At times this can cause wide ranging valuations in the market, creating
volatility.
Silver often tracks the gold price due to store of value demands, although the ratio
can vary. The gold/silver price ratio is often analysed by traders, investors and
buyers. In Roman times, the price ratio was set at 12 or 12.5 to 1. In 1792, the
gold/silver price ratio was fixed by law in the United States at 15:1, which meant
that one troy ounce of gold was worth 15 troy ounces of silver; a ratio of 15.5:1
was enacted in France in 1803. The average gold/silver price ratio during the 20th
century, however, was 47:1.
FACTORS EFFECTING PRICE MOVEMENTS

Gold prices are affected by: THE STATE OF THE U.S. ECONOMY
If our economy slows, it can negatively affect the economies of other
countries, and also commodity prices including gold bullion. But if a U.S.
slowdown is accompanied by a federal stimulus plan, gold prices may
increase. If the economy picks up and strengthens, gold prices can decrease.
U.S. STOCK MARKET
Under normal conditions, as the stock market becomes increasingly riskaverse (fear), gold gets a boost. When market traders are buoyant and
optimistic (confidence), gold-selling can cause the gold price to dip. Note
however that there have been one or two largely unexplained exceptions to
this phenomenon.
CHINA & INDIA GOLD IMPORTS
China and India are two of the leading gold importers. Such emerging
nations are more likely to view gold holdings as financial security. Volatility
with their respective currencies or economies could therefore affect the gold
price.
INDIAS DIWALI WEEK
The five-day Diwali Festival in mid-November is traditionally the time when
Indians en masse buy gold jewelry, coins and bullion, with as much as 6,500
kilos sold in one day. This is an annual ritual that is considered by many
Indian s to bring good luck.
Gold
In the 1990s, gold was in a bear phase. Between 1993 and 1999, it dropped 23 per
cent to a low of $255/ounce. This was when supply was rising with new mines
opening in Brazil, Australia and the US. Equity markets across the globe were also
doing extremely well.
However, from the lows of 1999, gold climbed higher and higher till 2012. The
dotcom bubble burst in 2000 that saw the Nasdaq sink from record highs was the
first big trigger for gold prices. The plunge in Internet stocks, which were till then
the market favourite, saw investors rushing to buy gold. By end 2000, the yellow
metal had hit $276/ounce.
Higher demand for jewellery from countries such as India, the UAE and Japan
meant gold ruled strong between 2001 and 2002. Also, as the dollar was
weakening, gold was the obvious choice for investors. Demand for gold bars, coins
was 11 per cent higher in 2002 in dollar terms. The dollar index, which measures
the value of the greenback against six major currencies, fell to 101.8 by end-2002
from 119 in end-2000.
SILVER
At a 26 August 2013 price of US$24.04 per troy ounce (31.40 gm.), silver is
approximately 1/58 the price of gold. The ratio has varied from 1/15 to 1/100 in the
past 100 years. Physical silver bullion prices are higher than the paper prices, with
premiums increasing when demand is high and local shortages occur.
In 1980, the silver price rose to a peak for modern times of US$49.45 per troy
ounce (ozt) due to market manipulation of Nelson Bunker Hunt and Herbert Hunt.
Inflation-adjusted to 2012, this is approximately US$138 per troy ounce.
Sometime after Silver Thursday (Silver Thursday was an event that occurred in the
silver commodity markets on Thursday, 27 March 1980. A steep fall in silver prices
led to panic on commodity and futures exchanges.), the price was back to
$10/ozt. From 2001 to 2010, the price moved from $4.37 to $20.19 (average
London US$/ozt). According to the Silver Institute, silver's recent gains have
greatly stemmed from a rise in investor interest and an increase in fabrication
demand. In late April 2011, silver reached an all-time high of $49.76/ozt.
In earlier times, silver has commanded much higher prices. In the early 15th
century, the price of silver is estimated to have surpassed $1,200 per ounce, based
on 2011 dollars. The discovery of massive silver deposits in the New World during
the succeeding centuries has been stated as a cause for its price to have diminished
greatly.
IMPACT ON INDIAN ECONOMY

GOLD
There is very little effect of gold price on the Indian economy. However, the
opposite is very true. The fluctuations in the economy affect the gold price in India.
The usefulness of gold as an economic indicator is questioned by some, but it is
still recognized as a hedge against the US dollar and as some measure of inflation.
Traditionally, the price of gold was seen to reflect the monetary inflation. Rising
inflation often coincides with a booming economy. A rise in gold prices can at
times be attributed to the booming economy.
When the dollar is seen is to be on rise, investors move away from gold and invest
in currency. This causes the price of gold to drop drastically. Since, dollar is
considered a global trading currency; there is a relationship between the value of
dollar, Indian rupee and the gold price. Hence, the value of the US dollar in turn
affects the fluctuating gold price in India.
The only real and direct effect that gold has on Indian economy is in the mining
sector, where individual companies may be under the direct influence of
fluctuation in the prices. Gold miners make profit from selling gold. Their profit
margins are highly determined by the prevalent gold price in the commodity
market.
SILVER
For the last few years, Silver has followed the gold price, rising and falling, further
and faster than gold. In so doing it has shown that the monetary influences on
precious metals are more of an influence than the fundamental demand and supply
factors. The fundamental supply and demand factors show a strong demand, based
on electronics and on its various medical applications. In following gold so closely
silver has seen investment demand dominate the price moves. While silver is not
considered a monetary metal by central or commercial bankers, the general
investing public sees silver as having the wealth-preserving qualities that a
monetary metal needs to have to qualify as such. This explains why silver follows
gold so closely.
Economic growth has enriched poor people on a broad front. People emerging
from poverty are keenly aware of the need for savings to shield them against
returning to poverty. They are not convinced that banks are the place to keep ones
cash savings as inflation has whittled away its buying power over time in every
country and, intermittently, currencies have been swallowed up in war and
runaway inflation.
Therefore, gold the time-trusted, investment, free of human interference, in itself
has been where individuals have placed their savings. In China this has been with
the encouragement of the government. In India the government is unhappy with so
much of GDP being absorbed by gold, but because of distrust in government and
its officials, the Indian investor favours gold as protection against Indian
institutions and inflation and always buys gold and silver, over time. The rise in
disposable income in Asia has led to a steady and growing investment in silver.
So, silver investments can be directly linked to economic growth in Asia.

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INTRODUCTION

INTERNATIONAL PRICE MOVEMENTS

FACTORS EFFECTING PRICE MOVEMENTS

IMPACT ON INDIAN ECONOMY

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