Impact of Trade Agreements on Gold

IMPACT OF TRADE AGREEMENTS ON GOLD

Introduction

According to the history, the first strong evidence was dating back to 3,000 BC when gold was discovered by Egyptians. They started producing gold coins and also produced gold maps. Gold is a valuable metal and flexible in nature. It has been an entirely important metal because of its valuable nature and utilized as a vehicle of trade or as cash. Gold is prevalently utilized really taking shape of gems. Since it is a decent transmitter, truly flexible and very bendable, it is utilized in hardware, normally as wiring. Other prominent utilizations of gold incorporate glassmaking, restorative medications and dentistry. [1] The Bretton Woods Agreement was established after World War II. It was made with a purpose to oversee and balance out the global Forex showcase. Countries marked to concur that their monetary forms were to be settled against the US dollar and an equivalent rate of gold. Starting of 2014, China was the world’s driving gold-mining nation, followed all together by Australia, Russia, the United States, Canada, and Peru. South Africa, which had commanded world gold generation for the greater part of the twentieth century, has declined to the 6th place. People invest in gold by buying gold bars or gold coins. The three most vital gold exchanging focuses are the London OTC market, the US futures market and the Shanghai Gold Exchange (SGE). Gold trading depends a lot on supply and demand in the market. Investors purchase gold as a fence or in place of refuge harbor amid monetary, political, or social vulnerability. The gold market is really worldwide and not at all like different products, consistently works nonstop, on account of an exchanging system. Banks generally issue gold certificates for gold that is either allocated or non-allocated. Gold certificates are still issued in the United States and Australia by using various gold pool programs. Many companies that produce gold have a share in gold mining companies.[2]

Production and distribution of gold

Gold mining operations which accounts to 75% are performed by the experts to meet the supply and demand in the market. Mine production has grown to a significant extent in the past few years. Majority of the world’s gold in the past few decades used to come from South Africa. Hedging takes place when the quantity of gold supplied to the market is strongly influenced by the forward selling of production. Gold has strong emotional and cultural affinity. Gold jewellery demands for 50% of the overall demand in other sectors. Most of the jewellery design is concentrated from India and China. There are bank demands from banks who sell gold to different consumers. Most of the consumers consider gold as an investment and try to retain it as an asset. Gold is a unique metal and geographically diverse. Gold mining takes place on almost every continent except Antarctica. Gold has a unique place in the Chinese market as it symbolizes the Chinese New Year where lots of jewellery is purchased by customers as an investment. India also has a thriving demand for gold and is a symbol of wealth and status among locals. The US market focuses on jewellery being purchased specifically for weddings. In Turkey, gold traders sell gold in the form of gold coins which plays an integral part towards the economy of the nation. Canada has a share of 5.1% in gold production while United States shares 7.3%.[3]

Pricing

The cost of gold is accounted for per ounce. Gold is traded as a product on numerous exchange platforms around the world. The COMEX (Commodity Exchange, Inc.) is the most vital trade platform that sets the spot price of gold. Few years back, gold was used to be sold at $20/ounce. Gold is now being traded at a price between 1200$/ ounce and 1900$/ounce. An investor refers to a 24-hour spot gold value diagram. The spot price of gold is the base cost of gold in unfabricated form without any markup. The cost per ounce is accounted for progressively as 24-hour exchanging follows around the world. Investors can choose to purchase gold from a merchant but it is necessary to refer to trade diagrams for AM and PM estimations. Since the stock market is very unpredictable, there are lots of risks involved while buying gold. Dealers decide the spot cost of gold on future trades. Extreme money printing will in general drive gold costs up, as there are more money units pursuing fundamentally a similar number of gold ounces. Prices of gold are affected by supply of mines, jewellery demand and geopolitical clashes. Investment of gold takes place by checking stock market for indexes with latest prices for gold. [4] National banks hold paper monetary standards and reserves. Established in 1987, the World Gold Council (otherwise called the WGC) is the market advancement association for the gold business in charge of animating interest, creating inventive utilizations for gold and taking new items to the market. Situated in the U.K., the WGC’s individuals incorporate real gold mining organizations. There are presently 17 individuals including Agnico Eagle, Barrick Gold, Goldcorp, China Gold, Kinross, Franco Nevada, Silver Wheaton and Yamana Gold. The World Gold Council has expressed that national banks have purchased more gold than they tend to sell. Since the national banks enhance their gold reserves, the cost of gold rises. There are many factors that influence the spot price of gold per ounce such as supply and demand, buying power and market speculation. Large companies and governments have substantial buying power and can directly influence the price of gold and impact the gold market. The gold spot price updates every 60 seconds in the world market, so the price of gold is very fluctuating. Gold prices are inversely proportional to the value of dollar in the market. This means if stronger the dollar, lower the price of gold.[5] The lowest price of gold in the past five years was at $1,057.10 USD per troy ounce in the year 2015 while the highest price was at 1,368.30 USD per troy ounce in the year 2016. Gold is generally measured in U.S. dollars because United States is the world’s most powerful economy and a stable market.[6]

Tariffs

There are wide ranges of taxes that are levied when gold is imported and exported into different countries. Value Added Tax (VAT) and Goods and Services Tax (GST) are still being levied on gold purchased in different countries. These taxes depend on the type of gold product and local area taxes. Another tax associated with gold is Capital Gains Tax which is being charged these days by many nations. Recently, United States announced that it will execute a 25 percent tariff on $50 billion of products from China and China hit back with its own tax implementation policy. After several negotiations between United States and China, the new tariff was set to 10% on Chinese goods. European Union, being in commonwealth with United States was exempted from paying export/import tariffs on metals. After the announcement on tariffs by United States, there was a major setback in the global market and the spot gold price increased from $1,292.51 per ounce to $1,309.30 per ounce. [7] United States is set to release high tariffs on Chinese imports which will put a pressure on the price of gold. Before implementing the new tariffs, discussion is being held by the two countries on how to solve the trade conflict. It is set to be assumed that there will be steady economic growth along with high inflation prices being reflected on the stock market in both the countries despite the new tariff imposed by U.S. Following the new tariff, China also announced that a revised tariff will be imposed on U.S. goods. [8]

Types of gold

Yellow gold- Pure gold is mixed with silver, copper and zinc. It is the purest form and usually needs less maintenance. It is the most favorable choice among consumers. 18 carat or 14 carat is generally used in engagement or wedding rings.

White gold- This type of gold is generally mixed with platinum. It can also contain nickel and zinc. It is strong and scratch-safe. Addition of nickel causes allergies to people. White gold has a cool, complex glimmer.

Rose gold- Rose gold is made by mixing gold, copper, and silver. Rose gold is more moderate than the other gold since it utilizes the reasonable copper content to give a rose shade. Because of its copper content, rose gold is more sturdy than any other gold.

Green gold- It is also called Electrum. It is blended with gold, silver, and copper. Silver is the metal that gives the gold compound the green shade.

100% pure gold is considered as 24 carats. It can scratch and bend. However, in United States, 14 carat gold is sold in the form of jewellery. According to the laws, it is considered illegal to sell jewellery as gold if the price of gold in under $10000 in the United States. These days gold electroplating takes place where a thin layer of gold is deposited on the surface of metal. Vermeil is also used where a thick layer of gold is used with sterling silver as the base metal.[9]

Impact of NAFTA agreement

The North American Free Trade Agreement is used to remove tariffs for trade between Mexico, Canada and the United States. NAFTA’s main motive is to promote monetary movement between the three noteworthy financial forces. Recently, President of United States focused to nullify NAFTA and other exchange agreements. A new trade agreement came into force between United States and Mexico called the USMCA – The United States Mexico Canada Agreement. It must be adopted by each country’s system. The U.S. – Mexico Trade Agreement will allow free access for horticultural products on both the sides. USMCA will enhance and promote wealth across the middle class and allow free movement of goods and services between the two countries. It will also lead to wide access to international markets and increase in economic growth among the two nations. To be qualified for tariff exemptions under the North American Free Trade Agreement (NAFTA), merchandise must be “originating products” inside the principles of the agreement. About one fourth of gold imported to United States is supplied by Canada and Mexico. The NAICS (North American Industry Classification System) code was established to measure the business activity between the three nations. With the implementation of NAFTA, gold trade has increased to a certain extent between the nations and has also resulted in steady economic growth. Trading of gold between the nations has resulted in growth in business and opened new jobs in this sector. NAFTA in place has resulted in many jobs being transferred from United States to Mexico which lowered the gold prices in the international market. People trading gold took major benefit by saving lots of money. To earn profits during trading, people started buying gold when the prices were low and then started selling them at a high price later when the stock market presented a change in prices. NAFTA also led to increase in import of gold from Canada and Mexico to the United States because of less political involvement between the countries. When NAFTA came into force, it is said to have a direct impact on the labor market of United States. It lowered the wages and many Americans lost their jobs during this period. Gold has been experiencing tensions recently. However, it has not broken the $1,180 level. Gold has fizzled at obstruction and has not possessed the capacity to take out the best end of the range as expected. Spot gold was steady on $1,191.41 per ounce recently. Gold can be viewed as a fence against oil inflation. Gold has fallen for as long as past 6 months and was down by 13 percent because of dollar quality. With the effect of new NAFTA deal, gold costs followed higher which obviously was a new obstruction.[10]

Impact of rules of origin

The rules of origin determine from where the product originated and used to recognize whether the product will receive preferential treatment towards tariffs or not. Rules of Origin are recognized to-

1)  put measures and instruments of business arrangements like anti-dumping obligations and protect measures. 2) decide if imported items will receive most-favored-nation (MFN) treatment or other treatment 3) label and mark the products 4) for government acquirement. To obtain fewer tariffs when gold is being traded, gold has to be from a Free Trade Agreement (FTA) party or should contain predetermined U.S. components in gold. Each FTA has its very own Rules of Origin that portray how traded products are transported to a nation and may obtain the benefit of reduced tariffs. To get specific treatment under FTA, gold must meet the following specifications:

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1) Gold must be made in the FTA domain. 2) It must meet the guidelines under Rules of Origin relating to specific types of gold being exported. 3) Proper documentation to be made and handed over to the importer or merchant. Originating goods are those which are wholly obtained in the domain of one or more nations associated to the FTA. Gold originated from United States will have different impact on tariffs being levied when exported to Canada.[11]

Impact of European union

There are four freedoms of the single market which are as follows:

1) Free movement of goods – it allows unrestricted movement of goods between the member states. Many duties which have to imposed on goods which are removed because of good understanding between the EU member states. 2) Free movement of capital- Unrestricted access to financial sources are available in the EU market. 3) Free movement of services- Various services established between the states allows easy access. 4) Free movement of people- This ensures labor market flexibility as people are free to work in any member state. These four freedoms form the backbone of the single market, intended to encourage states by creating exchange of gold, increase profits through wide credit arrangement and offering laborers more extravagant chances. Apart from these freedoms, there are 3 pillars that are governed during trade of gold in the European Union. The first pillar consists of the European Economic Community (EEC). It takes concerns regarding economic policies of EU which includes social and environmental policies. The second pillar addresses concerns regarding foreign and security policy. The third pillar concerns about justice and home affairs. The three pillars and four freedoms have strong impact on the gold prices in the international market. Gold prices tend to fluctuate in the European Union. However, EU is not bound to pay tariffs on gold being traded. EU exchange arrangement hopes to consolidate exchange and improvement. Permitting lower tariffs and supporting small organizations are some of the procedures in which exchange and advancement can work to improve trade of gold.[12]

Impact of WTO

WTO builds up an arrangement of worldwide exchange rules concentrating on the progression, which assumes a solid job of empowering and directing towards globalization. This paper examines the WTO’s impact on gold trade with the current trade policy adopted by various nations. WTO’s main goal is to give satisfactory focus on trade among the individuals, which needs perceived basic guidelines and standards for individuals to withstand. There are two fundamental standards called the most favored nation rule (MFN) and the national treatment rule. MFN rule guarantees that all individuals have equal opportunities and national treatment ensures that the exporter and shipper have equal chances to proceed in international trade. WTO has agreed upon rules for intellectual property to protect gold especially in the form of jewellery being traded between different countries. [13]

Conclusion

We can summarize by discussing about the impact of various trade agreements like NAFTA, WTO and USMCA on gold trade in the international market. Trade agreements have the genuine objective of enhancing trade relations among the strong economies. They tend to grow generation of merchandise and enterprise and achieve understandings in the worldwide trade market. Through these impacts on gold trade, it has extended the scope of market access for all nations. The trade strategies developed by nations contribute to a considerable amount in marking the prices of gold in the stock market. Important decisions made by various nations on change of tariffs results in significant price changes on gold sold in the international market. There is strong need to change the trade policy of each nation involved in trade so that gold as a valuable metal can survive in the market. It would be helpful to weaker nations (in terms of economies), if taxes involved in trade of gold are kept to a minimum. This would lead to higher trade participation among different countries and would have impact on the labor market. Wages would tend to increase and skilled labor can be employed to manufacture gold in businesses like large plants or factories. Freedom of movement among people would lead to exchange of labor and weaker nations can increase the value of their local currency. In today’s world, gold is seen as an asset rather than a commodity and people buy it for various reasons.

Bibliography

 

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Brilliance. 2018. https://blog.brilliance.com/diamonds/white-gold-vs-yellow-gold-vs-rose-gold-rings.

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