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It is almost undeniable that global economy is linked to the U.S. economy. When the U.S. economy shrinks and the value of dollar is weakened, businessmen are prone to invest in gold due to its higher price. When the U.S. economy becomes a little stronger, the value of dollar is also becoming stronger and there is falling price of gold. Gold price had fallen to an astonishing amount of $270 per ounce in April 2013. Now the price stands at around $1,300 per ounce. In an interview with Dr Sein Maung, chairman of First Private Bank Limited, we explore the effects of the U.S. economy on global economy, and the link between dollar value and gold price.

 Reasons for Fluctuating Gold Price

When it comes to falling gold price, you need to understand why its price is increased. In terms of capital, there are assets and currencies like gold, dollar, euro, yen, and others like oil, real estate, and then some. First of all, the reason for increased gold price should be assessed.  Closely linked to dollar is gold. The value of dollar has been affected by the U.S. economy, with extremely high budget deficit, deficit in current account balance and too much foreign debt. At the time of unstable U.S. economy, the two political parties in the U.S. are unable to negotiate, resulting in declining confidence on dollar. At the same time, the euro which can take the place of dollar is in bad shape due to euro zone crisis. Higher price of oil has had knock-on effect for accumulating gold as a reserve of value. When it comes to protecting wealth, you’ll lose money if you save dollar, therefore gold has turned out to be attractive.

Then the price of gold jumped to $1700, and then dropped again to around $1300. Falling price of gold is related to basic factors increasing its price. With the improved U.S. economy, the value of dollar is now becoming somewhat stable. In the U.S., there are falling unemployment rate and reduced budget deficit. The relationship of the two parties is also being improved. In short, the recovery of economic powers like Japan and European countries causes more stability in dollar. So, dollar and gold price is inter-related and the lowered value of dollar increases the price of gold. Now the U.S. economy is rather improving with a little stability of dollar on the one hand, the price of gold is fallen on the other.

There are a variety of uses for gold and 50 percent is mainly for use as jewellery, in addition to saving it as an investment. Moreover, central banks are, after loosening grip on dollar, now buying gold although they held much reserves of dollar in the past. For example, governments of India, China and Brazil are turning to reserve gold. Currently, central banks are increasingly purchasing gold. They had reserved dollar up to 80 or 90 percent previously, but that has fallen to 65 percent at present. Now that the U.S. economy is in better shape with stable dollar, the buying of gold has rather decreased. The U.S. stock market is also in good condition with prospects of U.S. economy. If you keep gold, you can’t get interest as it is static. You’ll get the premium only if its price becomes higher. When you invest in stock markets, you’ll gain lots of profits when share prices are increased. Even if you buy treasury bills of the U.S. government, you’ll gain an interest of $2 to $3. When people turn to them, the price of gold is fallen back. Another reason the U.S. economy is recovering is the discovery of large amount of shale gas. The U.S. used to import a great deal of energy and gas from other countries, and now that they’ve discovered shale gas, that also becomes one of the reasons making the U.S. economy recovered.

 Possible Consequences if Countries like Spain and Greece Sell their Gold Reserves

That should have no impact on the gold market. Because when they think of selling gold, they’re required not to impact the gold market by following IMF’s guidelines for trading gold. China might have some amount of gold as reserve currency. European Central Bank reserves the largest amount of gold. As central banks have their ethics, even if they plan to sell gold, they are required not to have too much impact on its price. They will have to sell sparingly even if they want to.

The Influence of U.S. Economy on Global Economy

The U.S. government, amid its economy in bad shape, was buying with newly-printed money notes the securities and corporate bonds it has once sold, as a measure for quantitative easing. The Federal Reserve has decided to inject $85 billion a month. Now that the economy is somewhat recovering, they are considering to reduce quantitative easing. As the U.S. economy is vital in global monetary system, there’d be much instability if it becomes unstable even in small extent. As people pointed out that turmoil, Federal Reserve chairman Ben Bernanke had to stop it telling they’re not doing it immediately. That included two conditions. The first one is the unemployment rate. If it is lowered from 7.5 percent to 6.5 percent, which can lead to recovery of the economy, they’ll reduce injection from $85 billion to $65 billion step by step. Another thing is if they want to buy back securities or the like, they have to print dollar notes, so they have to consider any possibility of inflation. At present they have set inflation to be around two percent. That’s because if they continue printing money, there’ll be more inflation. So, to summarize, one of the two objectives of the Federal Reserve is to control inflation and another one is to reduce unemployment. So, global monetary system is much related to the policy of the Federal Reserve. Now with the prospect of slowly reducing QE, there’s some impact on Rupee of India and Rupiah of Indonesia, in addition to its impact share prices of Asian countries.

U.S. Economy and Global Economy

The U.S. had Full Employment Act in the past. The meaning of full employment used to mean unemployment rate of about 4 percent. Now with the much changing economic conditions, they are assuming the unemployment rate of some 6.5 percent to be normal, calling it New Normal. Compared to the global economy, the U.S. economy is having much import and less competitiveness, and there are budget deficit, trade deficit and current account deficit. The one time global engine of economy is now losing its power. Both the U.S. and EU are losing momentum to pull the global economy. BRICS countries like China, India and Brazil are now becoming the engine. In turn, China’s economy is slowing down. Due to condition of the U.S. economy, China is exporting less to the U.S. and turning to its own domestic consumption. All the conditions of the global economy are slowing down. Japan is also undergoing deflation for nearly two decades, and only after Shinzo Abe becomes prime minister, with new monetary policy and fiscal policy, the economy is a little bit improving. Now, Japan is also doing quantitative easing, printing money notes at the cost of inflation. The global economy is globalized and there’s financial globalization among countries, and an action of a country will have an effect on another.  When the U.S. prints out money by undergoing QE, there will be effects of inflation in other countries.

If Japan is now planning to carry out QE, there will be some impact to a certain extent. But they are also doing it only after initial agreement. Previously also, when dollar value rose more than expected, the exchange rate was agreed among four or five economic powers. So, economic and financial systems of the world including the gold price are all inter-related.

 Ways of Doing Business Globally

Businesspeople are ever weighing up things. They’ve got giant stock markets in their countries. They’re always calculating whether to hold on to gold even if it gives no interest, or to invest in stock markets, or to purchase bonds even if it gives you less interest. As they want more profits, they are always on the lookout for alternative investments. We here have got land and gold only. We’re also reluctant to save dollar due to some control from Central Bank. Now that dollar is considerably becoming stronger, gold price around the world is falling, so also here. Gold price at home is also influenced by trade in and out from China or Bangkok, resulting in connection with gold prices from these places.

Current Investment Options for Myanmar Businesspeople

You’ve got to cover as much investment as possible. It’s not to put all eggs in one basket, but to diversify, like buying enough amount of gold, holding enough real estate of higher prices with less potential to devalue—although decent estates are hard to find now. You can also invest in prospective companies. You’ll need to balance the risk by safeguarding one thing with another.

  Translated by Nyan Hein Latt