Key Factors Influencing the Purchasing Behavior in Gold Ornament - Case Study Example

Gold Trends (Name) (University) 2.1 Historical Perspective of Gold Market Perhaps the earliest use of gold is in what is today Eastern Europe, where civilizations there used the precious metal, mined from Transylvanian Alps to fashion decorative objects in 4000 B.C. Other instances of early use of gold include the Sumers of Iraq, Egyptians and the Babylonians (NMA, 2015). It was around about 1500 BC that the commercial use of gold began proper, with the shekel becoming the standard measurement unit in the Middle East. It was a coin that contained part gold and part silver, together with a naturally occurring alloy called electrum. The shekel coin weighed 11.3 grams. Gold has endured through the years, from the earliest BC years to late BC, where the first coins made purely from gold were made(NMA, 2015). In the 19th and twentieth centuries, gold gradually replaced silver as the currency of choice. It became the basis of the world capitalism monetary movement, the biggest standard of price and the true measure of value. The functions of gold and its endurance as a valuable commodity, luxurious good, financial and monetary asset are further reinforced by its physical properties. It is practically indestructible, highly durable, maintains its physical properties and does not tarnish like silver. It is malleable and therefore easy to divide, and has a high weight to volume ratio, which makes small quantities suitable for transport and transactions (Schenk, 2013). Despite its suitable physical and functional properties, not much has been written on the metal’s history and usage, at least until the political elites of the world placed it at the center of the international monetary system in the 19th and 20th century. The gold standard was a pivotal time in the history of the gold market. A genuine gold standard refers to the basic monetary unit where a specific weight of a gold alloy of some purity, or the equivalent on pure gold. Prices are therefore expressed either in this unit or in fractional units that are based on this unit (Selgin, 2013). The Global gold standard movement grew in the decade between 1870 and 1880, driven mainly by the pioneering France getting rid of free silver coinage in 1873 followed by the Latin monetary Union in 1876. Germany’s gold switch and the US then sealed the deal (Selgin, 2013). The gold standard era lasted until around about the First World War. During times of war, it is common for countries to abandon their commitment to convertibility. During and after the war, the gold standard failed as a result of its dependence on the collaboration of central banks. So important was the gold standard that many believe it to be connected to the great depression of the twenties. Countries not on the gold standard did not experience the worst of the depression, and those who were on the standard only experienced improvements when they went off it (Irwin, 2012). Other important events in the 20th century with regards to the gold market include the reopening of one of the most iconic gold markets, the London gold market, in 1954. While Americans were forbidden to own gold both abroad and at home in 1961, the central banks of Belgium, Italy, France, Switzerland, West Germany, The US and Netherlands agree to form the London gold pol, which saw them agree on the buying and selling price of gold at 35.0875 dollars per ounce. In 1967, South Africa produced the Krugerrand, a one ounce bullion which later became an investor favorite. Events in 1968 further shaped the Gold market, with the London Gold Market closing temporarily for two weeks as a result of a sudden surge in the demand for gold(NMA, 2015). Consequently, the governors of the central banks of the London gold pool countries agree on a two tier pricing system, which saw them agree not to sell gold on the private market again(NMA, 2015). More gold market events include the introduction of the Canadian one ounce maple leaf in 1979, the Panda bullion coin in China in 1982, the Britannia gold bullion coin by Britain in 1987, Austria’s Philharmoniker bullion coin and the formal establishment of a domestic old market in Russia in 1994. The dual functionality of gold, as both a monetary standard and traded community, has seen it play and continue to play a pivotal role in world economy. It has, especially, been important in the economy of the UAE, one of the fast rising economies of the Middle East. 2.2 Background of Gold market in U.A.E The UAE has been one of the fastest growing territories in the region in the past few years. Dubai especially, buoyed by increased foreign investment and a vibrant tourism industry, has experienced high levels of growth (Cooper, 2013). Despite the fact that Dubai and UAE’s growth has been slowed down after the 2008 recession, it is still on track (Jones, 2012). Sometimes referred to as the city of Gold, the precious mineral has been at the center of the growth patterns in the UAE and especially in Dubai. A look at the market from a regional perspective might be helpful. During the recession in 2008, the role of the dollar as an international reserve asset and currency was severely damaged. Over the past few years, the US has accumulated a large balance of payments, piling up liabilities that have undermined international confidence in its power. It is thought that over the coming decades, the dollar will most likely give way to multi-currency arrangements, at least according to historical trends (Scacciavillani & Saidi, 2010). The endorsement of Gold by such big name economists as the Nobel laureate Robert Mundell in his 1999 acceptance speech has had people looking more closely at the role of gold in the monetary system. The Golf Monetary Union in particular, has the chance to move the GCC countries to a region where the monetary policy can easily be fine-tuned against such situations as inflation, business cycles and changing global situations. The hybrid nature of gold often cannot be explained by the conventional asset pricing models, a fact which has seen many economists dismiss it as a relic of the past in terms of exchange and storage value. However, in terms of uncertainty, as in the 2008 recession and the few years afterwards, the functions of gold resurface strongly (Scacciavillani & Saidi, 2010). Despite its role in the international monetary field waning, it has never been priced purely as a commodity. When people begin to lose trust in paper, the price of gold surges. The price of gold is currency specific, because of the fact that it is often quoted in US dollars. This means that in reality, gold has many prices, which essentially can move in many different directions. The Gold Standard weakened after the First World War and the use of Gold was later abandoned altogether in 1971. However, recently, central banks, especially those in emerging markets, have shown renewed interest in holding gold reserves for diversification. On the other hand, central banks in Europe have slowed down their gold sales. According to Nugee (2000), here are the reasons for central banks to hold gold reserves (Nugee, 2000). The war chest argument indicates that gold is the ultimate asset especially in times of uncertainty, and has in fact appreciated in the past. It has in the past kept its value and acted as a hedge against inflation. It has no default risk and is considered nobody’s liability. As such, it cannot be frozen, defaulted on or repudiated. It also has a legacy role from its reputation as the backing for paper.The liquidity, portability and acceptability of gold makes it ideal in times of crisis as a safe haven medium. Safe haven refers to a security that is not related to stocks or bonds, and is therefore unaffected by a market crash (Baur & Lucey, 2009). This has resulted in the rise in demand and credibility of gold in by central banks in the region. Despite the UAE being a major gold player and Dubai being christened the city of gold, the scenario is often shrouded in controversy. An example is the conflict gold situation and the controversial gold audits of Dubai. For instance, according to global witness investigations done in November 2013, Dubai was revealed as the main destination for gold from Congo, laundered through Burundi and controlled by rebels often in violation of the rights of the people mining, sometimes children (Global Witness, 2014). Despite this, the local gold market in Dubai and the UAE is still vibrant. This calls for a look into consumer buying behavior in the region. 2.3 Definition of consumer buying behavior Consumer buying behavior refers to the collective processes and acts that motivate the purchase and use of products (Sharma, 2014). The knowledge of consumer behavior is becoming more important, with experts looking to understand how consumers choose from different brands, products and options. With regards to gold, three situations have resulted in increased investment. There has been increased globalization and individualization. The monopoly of the manufacturers has now been replaced with the power of the consumer, with increased demand pressure all across the world for the production of unique and customized products. Secondly, there has been increased availability of information on investment and the value of gold. Every investor makes thorough searches before taking a decision, and the availability of such information with regards to gold has contributed to consumer purchase and investment decisions. Third, one of the major influences of investment decisions is the availability of surplus money and the need to preserve it for future use (Lutter, 2008). With increasing evidence of recovery from the recession in 2008 and its effects, the demand for gold is likely to grow with the increased availability of resources. The economic developments in the past few years have raised the profile of and changed people’s perceptions towards (Chaisuriyathavikun & Punnakitikasem, 2014). It has grown into a safe haven investment tool and a way of making profits. Several factors have been seen as influencing the consumer behavior towards gold in various regions and market. There is evidence of reference group influence, with many buying gold ornaments for gifting friends and family. Another major influence of the purchasing power of gold is the investment value, with many seeing a potential increase in the future (Chaisuriyathavikun & Punnakitikasem, 2014). Globally, the biggest demand for gold is for the manufacture of jewelry, for investment purposes and for the manufacture of technological components. Gold for jewelry has the highest demand among these, accounting for about 50 per cent of total global demand. Private investments and the increasingly bigger role of central banks accounts for approximately 39 per cent of the demand. Manufacturing, industrial and technological applications account for the remaining 11 per cent (Honey, 2013). Scarcity is another factor known to influence gold consumption patterns. Generally, there are two types of scarcity, environmental and human induced scarcity. Gold scarcity falls under the environmental category, and is precious because of its limited availability in nature. Generally, consumer literature places scarcity at a major attribute from which the consumer infers price and uniqueness, making it a major influence in consumer decisions with regards to gold. The gold market in 2014 ended the year on a strong footing, with the fourth quarter experiencing a growth rate of up to 6 per cent. The annual total of the year was down four per cent at 3923 tons, which is not surprising considering the surge in demand in 2013. After having suffered weak year-on-year trends for much of 2014, gold jewelry demand finished the year on a high, with the US and India being particularly strong. 2014 stood out in Indian jewelry demand, with demand eventually exceeding the previous year’s by about 8 per cent. The US continued its trend of consistent improvement, with the fourth quarter in 2014 being the seventh consecutive quarter of improvements in demand. Central bankers, seeking diversification from the hold and power of the US dollar also absorbed much of the gold demand in 2014. Institutions mostly in the Commonwealth of Independent States continued to increase their gold holdings. The central bank in Russia was once again the biggest purchaser, adding up to 173t to its already huge gold reserves. Russian gold holdings now stand at approximately 12 per cent of its overall reserves, at about 1200t. Kazakhstan and Iraq central banks were also active participants in the gold market.Gold sales also reduced, with Ukraine’s 19t sale the largest, and understandably so with regards to the events in the country. With mines being more developed and operational in the past few years, mine production improved for the 6th straight year, going up a record 6 per cent (WGC, 2015). References Baur, D. G., & Lucey, B. M. (2009). Is Gold a Hedge or a Safe Haven? an Analysis of Stocks, Bonds and Gold. Chaisuriyathavikun, N., & Punnakitikasem, P. (2014). Key Factors Influencing the Purchasing Behavior in Gold Ornament. 7th Asia-Pacific Business Research Conference. Sigapore. Cooper, N. (2013). City of Gold, City of Slaves: Slavery and Indentured Servitude in Dubai. Journal of Strategic Security, 65-71. Global Witness. (2014). CIty of Gold: Why Dubai's First Conflict Gold Audit never Saw the Light of Day. Global Witness. Honey, M. (2013). Gold and Consumer Behavior- A Comparative Study of Cochin and Delhi. CPPR- Center for Comparative Studies. Irwin, D. A. (2012). The French Gold Sink and the Great Deflation of 1929–32. Cato Papers on Public Policy, 1- 56. Jones, D. Z. (2012, October 21). Gulf News. Retrieved from Dubai on track to repay a $10b loan: http://gulfnews.com/business/economy/dubai-on-track-to-repay-a-10b-loan-1.1092236 Lutter, J. L. (2008). Consumer Behavior During Investment Gold Purchase in Comparison to Other Investment Instruments. Tallinn: Tallinn University. NMA. (2015, September). NMA. Retrieved from The History of Gold: http://www.nma.org/pdf/gold/gold_history.pdf Nugee, J. (2000). Foreign Exchange Reserves Management. London: Centre for Central Banking Studies, Bank of England. Scacciavillani, f., & Saidi, N. (2010). The Case for Gold as a Reserve Asset in the GCC. Dubai: Dubai International Finance Center. Schenk, C. R. (2013). The Global Gold Market and the Internationa Monetary System. In S. Bott, The Global Gold Market and the International Monetary System from the Late 19th Century to the Present (pp. 1-17). New York: Palgrave MacMillan. Selgin, G. (2013, June 20). The Rise and Fall of the Gold Standard in the United States. Policy Analysis, pp. 1- 20. Sharma, M. K. (2014). The Impact on Consumer Buying Behaviour: Cognitive Dissonance. Global Journal of Finance and Management, 833-840. WGC. (2015). Gold Demand Trends: Full Year 2014. World Gold Council. Read More