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ECONOMICS - Essay Example

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ECONOMICS Contents Introduction 3 Gold, Long a Secure Investment, Loses Its Luster: Background overview 3 Demand and Supply Analysis 5 Gold looses its luster: Rational behind plunge in gold prices 6 Price elasticity of demand for gold 8 9 Strategic decisions for investment in gold 9 Conclusion 11 References 11 Introduction The prices of gold have gone through the phases of boom and bust over the last thirty years…
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Download file to see previous pages The recovering signs of the world economy due to good performance by the policymakers led to the fall of gold prices as the demand for gold fell due to higher return on investment in other class of assets. Gold, Long a Secure Investment, Loses Its Luster: Background overview During the period of economic recession, the prices of gold soared and became the sought after investment for the investors. The rise in the prices of gold meant that the world economy was not performing well. Due to the economic recession and the global financial meltdown from 2008 to 2011, the gold prices reached its highest peak in 2011. This could be observed from the producer price index as given below. Due to the crisis in the economy, the total factor productivity of the nations was hit and the factors of production were affected due to the downturn of the economies. The crisis in the economy gave rise to a situation of liquidity crisis. The fall in income levels of the people led to the fall in consumption demand in the economy. Due to this, the productivity of the business houses and industrial bodies fell. The fall in revenue and profitability led to the erosion of wealth of the shareholders and market investors. Along with this the erosion of confidence of the investors on the stock performance of the companies led to the fall of valuation of the companies and market indices. As a replacement for the investment in stock markets, the investors confided on the investment in gold markets (McGuire, 2010, p.37)1. The investment in gold was considered to be lucrative as prices of gold increased on the back of high demand for gold. An investment in gold offered higher returns on investment and there was no erosion of wealth from the amount of investment. Apart from that gold could be sold at any point of time and was considered as marketable investment. The presence of large number of buyers gave the opportunity to transform it into cash at any point of time. All these factors led to the rise in the prices of gold. Investment in gold was deemed to be an investment that would in which the returns obtained would never be lowered (Northcott, 2010, p.46)2. The spurt in he gold prices over the last few years fuelled by weak economic conditions has been represented below. Demand and Supply Analysis The fluctuation in the price of gold could be explained from the demand supply curve for gold as given below. As the demand for gold rose in a weaker economic condition, the demand curve shifted from position 1 to 2 depicted by the red line. As a result, in order to maintain a position of equilibrium with the supply, the prices of gold rose from P1 to P2. The reverse is also true for fall in prices for gold as a result of fall in demand. Gold looses its luster: Rational behind plunge in gold prices The unexpected plunge in the prices of gold in recent times has occurred as result of recovery in the performance of the economies all over the world. The correct strategies adopted by the policymakers in order to maintain a proper balance of supply and demand in the economy, controlling inflation through appropriate interest rates, fiscal and monetary policies have led to turn around of the economies of the world. The economic reforms and recovery from the economic recession led to improvement in the performanc ...Download file to see next pages Read More
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