Commodity Online
MUMBAI: Global gold prices zoomed to touch a high of $926 per ounce as the week ended on recessionary fears that are driving several nations and economies to an unprecedented crisis. Gold prices are zooming thanks to shortage of the yellow metal and the devaluation of all leading currencies in the world.

An analysis from Quantum Gold Fund says the currency- gold ratio has been steadily falling in USA which means more and more paper money is printed which is backed by fewer gold assets.

A comparative study of currency in circulation issued and the corresponding gold held by Central banks in developed countries such as US & UK shows that currency-gold ratio is steadily falling. “We divided the gold reserves (in tonnes) held by central bank with the currency in circulation (in bn dollars) of that country. And the result was not surprising. Gold held by such central banks relative to the currencies issued by them has fallen considerably over the last few decades, especially in US,“ Quantum Gold Fund said.

For e.g.: In the U.S, in 1973 gold held by central bank was 8,584 tonnes and currency in circulation was $61 bn. If we divide the gold held by the currency in circulation, we get a ratio of 141.2 i.e. 141.2 tonnes were held per 1 billion of currency in circulation. In 2007, the U.S central bank held 8,133 tonnes and the money in circulation was $759 bn. The ratio has now become 10.7 i.e. only 10.7 tonnes of gold held per billion dollars in circulation.

The falling trend indicates that more and more paper currency issues in circulation is backed by less and less gold. The backing comes only in form of the faith in the Government, which is fast dwindling due to the financial crisis and the massive bail outs, especially in US.

The Quantum Gold Fund says that gold is seriously undervalued and therefore investors should buy gold before it gets expensive.

”A proxy currency such as "GOLD" holds intrinsic value, since the supply of it is limited and which is not in control of any Central Bank. Gold has a unique characteristic of "store of value", vis-à-vis paper currencies. Paper currencies tend to lose value over a period of time due to inflation (loss of purchasing power) caused by over supply as it leads to a situation where more and more currency is required to buy the same amount of goods,” it says.

If the U.S were to get back to the ratio of gold held per billion dollars in circulation as to its 1973 level of 141, then they would have to increase its gold reserves to 107,153 tonnes as against current holdings of 8,133 tonnes, an increase of more than 13 times.

With the financial crisis not over yet and the recession looming large, central banks would continue to inject more and more money into the financial system.

Thus the debasement of the currencies will continue making Gold more and more attractive as a hedge against the dwindling purchasing power and the loss of faith and confidence in paper currencies.