Wednesday, November 4, 2009


The IMF on Monday announced the sale of 200 metric tons of gold to the RBI. The total sales proceeds are equivalent to US$ 6.7 billion at an average gold price of $ 1045 per ounce.

India's gold trauma occurred in the summer of 1991, when faced with dwindling foreign exchange reserves and a possibility of a default on payments, the government hocked 47 tons of gold to the Bank of England and 20 tons of gold to the Union Bank of Switzerland to raise $ 600 million.

The move helped tide over the balance of payment crisis, and also kick-started the reforms process when the next Prime Minister, Narasimha Rao, appointed Dr Manmohan Singh as the finance minister (Dr Singh is India's current Prime Minister)

That was then. This is now. Lurking behind this purchase is the unease about the future of dollar. India’s finance minister Pranab Mukherjee said, "It doesn't mean we don't prefer the dollar any more or like gold any better."

Therein lies the ultimate truth – if you are able to read between the lines.

Of India's current foreign exchange reserves of nearly $285 billion, foreign currency assets account for more than 90% ($268.3 billion), followed by gold ($10.3 billion), IMF's Special Drawing Rights ($5.2 billion) and a reserve position in the IMF of $1.59 billion.

While India's current gold holdings, accounting for just 3.7% of assets, are said to be historically low, buying 200 tons in addition to the 358 tons it already holds is expected to bump up the gold reserves to more than 6%. The dash to gold is prompted by the unsteady dollar and countries such as China, Russia and Brazil have already gone this route.

India is the world's largest private gold consumer, but the government's holding of gold as an asset is modest. Even so, the latest purchase puts it at Number 10 among the list of top 10 gold-holders in the world. The above graph was true before the purchase, where India does not figure in the top 10.

Gold holding is divided up into two parts. The first is government holding – largely held by Central Banks (in India it will be the Reserve Bank of India = RBI) and IMF. The second is private holding.

When it says that India has now come in the top 10 countries holding gold at 10th spot, it is only talking about Central Banks (CBs). Hence, in the above graph where India did not find a space, India today comes in at No. 10 in that spot.

The rationale of CB holding gold is well know and tying currency to gold has been debated till death from Bretton Woods days and we will not digress here on this issue.

The larger issue is of the total gold in circulation in this world what % are with CBs + IMF (institutional holdings) and what % are in private hands.

And the astonishing answer is this - Ownership of world gold:

* CBs of differnt countries and IMF: 8.65 % of world gold stock
* Private hands (worldwide): 91.35% of world gold stock.

Essentially India’s RBI buying gold and putting in top 10 dealt with the fact that all of the central banks (CBs) of the world + IMF only hold 8.65% of gold that is available in the world.

Over 91% of world’s gold is in private hands (with people all across the globe). And guess which country is number one in his regard – far above the rest of countries.

It is our very own INDIA - with approximately 30,000 tons.

Gold absorption into private hoards for the 20-year period from 1950 through 1970 was of the same order of magnitude as the entire U.S. gold reserve at its peak in 1949, the largest gold concentration ever in history: just short of $ 25 billion. It was followed by the greatest dissipation of gold ever. This private absorption of gold is unprecedented, both as to its magnitude and its speed. The total amount of gold absorption for the entire 56-year period 1950-2007 was approximately $ 90,000m, an amount greater than all the gold produced in history before 1950.

Fifty percent of all the gold in existence has been produced since 1960.

Output from Western mines plus Russian gold sales before the collapse of the Soviet Union (approximate quantities in gold dollars at $35/Troy oz.):

1950-51: $ 2,000m; 1952-65: $ 21,000m; 1966-68: $ 3,400m; 1969-2006: $ 77,500m.

Absorption into private hoards from mine output, gold pool sales plus US/IMF/central bank gold auctions (approximate quantities in gold dollars at $35/Troy oz.):

1950-51: $ 100m; 1952-65: $ 9,000m; 1966-68: $ 3,200m; 1969-2006: $ 80,000m.

Look at another graph – the slush funds country wise that is parked in Switzerland. Here too India is far ahead, leaps and bounds over other countries. My article on this was: India has US 1.4 TRILLION in slush funds parked abroad - time to bring it back.

Bottom line, India’s central bank is catching up where India’s private citizens have been prudent enough to do over centuries. Even the Chinese seem to have taken a keen interest in India’s internal appetite for gold. China mining is reporting: Gold Rush: India to mine 20,000 tons gold reserves.

For an exceptional analysis: read this article - Indian Gold Reserves. Forgotten History! New Opportunity?

The above article portrays India’s love affair with Gold started 2000 years ago and how countries at that time too wanted to short change and cheat India. Since we do not always heed history and its lessons – we must read and know why “history repeats itself."

Sample from the above article: "For much of the last 2000 years of recorded history, India has been the largest buyer of gold. Roman historian, Pliny, lamented some 1800 years ago, how India, the sink of precious metals, was draining Rome of gold – an appellation that resonates even today. To “manage” this drain of gold, Romans started cheating the Indians. They reduced the gold content in coins. Septimus Severus, (193 AD-211) further debased the currency. Indians just stopped accepting the debased coin – and demanded payment in pure gold."

This point is stressed in A Short History of International Currencies by Christopher Weber : "India was the first foreign country to stop accepting the denarius and insisted on payment in pure gold. And then the rest of the world followed. This blow to Roman trade translated into a huge decline in Roman living standards. Imports became beyond the reach of any but the very wealthy.

When India started to insist on gold, the Romans began to cheat again. They issued “gold” coins that had up to 50% base metal. But this fooled no one for very long, and soon India and the rest of the Asian world stopped accepting these
. "

The US Dollar – a very sharp and short look.

The US Central Bank (CB) reportedly has 8,117 tonnes of US gold which the Treasury says are in “Deep Storage”. A most unusual and evasive categorization of gold! There are doubts regarding CB gold. Do they have what they say they have? Is there any gold at all left in US gold reserves?

This is a very real fear about the worth of the paper dollar – which is being printed at even greater speeds by the US Federal Reserve, creating a cash surplus and feeding another asset bubble. The gold to back the dollar is gone.

Robert Fisk writing in Independent states: In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.

"The Russians will eventually bring in the rouble to the basket of currencies," a prominent Hong Kong broker told The Independent. "The Brits are stuck in the middle and will come into the euro. They have no choice because they won't be able to use the US dollar."

Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars. Bankers remember, of course, what happened to the last Middle East oil producer to sell its oil in euros rather than dollars. A few months after Saddam Hussein trumpeted his decision, the Americans and British invaded Iraq.

Nouriel Roubini, the eminent economics professor and visionary at NYU, correctly predicted the US economic meltdown. Now comes his latest salvo : Mother of all carry trades faces an inevitable bust.

In this article which appeared in Financial Times on Nov 1, Roubini is saying that the Fed policy of printing dollar incessantly and keeping rates on hold has given excess liquidity in the market which in turn has helped purchased risky assets abroad thus pushing up their prices. The real cost of borrowing is in the range of - 20% (negative) and returns are 30% on the risky assets, making real returns in excess of 50 to 70% (if you add back the negative cost of borrowing).

However, the negative cost of borrowing will move to zero cost of borrowing, knowing off a cool 20% from real return. At this time, people will short dollars to cover their positions and sell the assets (which were risky in the first place) thus triggering off the final round of the meltdown game.
For a more elaborate and better understanding, please read the whole article.




CAVEAT: One of the replies from Anon deserves mention here. He has pointed out that it can be near "impossible" to know if the gold bars are pure gold or tungsten coated. The article : FAKE FEARS OVER ETHOPIA's GOLD should be an important lesson for all of us. Another interesting take out is Tungsten coated gold which makes it near impossible to tell the difference. Tungsten actually weighs the right amount. Interestingly, the density of tungsten is virtually the same (to three decimal places) as the density of gold.

ARTICLE: A top-of-the-line fake gold bar should match the color, surface hardness, density, chemical, and nuclear properties of gold perfectly. To do this, you could could start with a tungsten slug about 1/8-inch smaller in each dimension than the gold bar you want, then cast a 1/16-inch layer of real pure gold all around it. This bar would feel right in the hand, it would have a dead ring when knocked as gold should, it would test right chemically, it would weigh *exactly* the right amount, and though I don't know this for sure, I think it would also pass an x-ray fluorescence scan, the 1/16" layer of pure gold being enough to stop the x-rays from reaching any tungsten. You'd pretty much have to drill it to find out it's fake. (Unless, of course, central bank gold inspectors are wise to this trick and have developed a test for it: Something involving speed of sound say, or more powerful x-rays, or perhaps neutron activation analysis. If bars like this are actually a common problem, you certainly could devise a quick, non-destructive test for them, and for all I know, they have. Except, apparently, in Ethiopia.) Such a top-quality fake London good delivery bar would cost about $50,000 to produce because it's got a lot of real gold in it, but you'd still make a nice profit considering that a real one is worth closer to $400,000.


Anonymous said...

Hi BuA,

This article of yours is an interesting analysis and for a few of us, a respite from the geopolitical overtones of your other entries :)
Its startling to note that India tops the list of world's Private Reserves of Gold. If it is true, does it not mean that India has to be the mother of all corrupt countries, cause we still see so much of poverty everywhere! As an Indian therefore, what stops me from saying - I want a share of that Gold too!
Christopher Weber's history bit about India and rest of Asia's dealing with ancient Rome was a very interesting read.

Dollar is crumbling and how!





Respite from geopolitical overtones - well what can I say. This blog is about geopolitics and few musings.

Coming back to the point that you raised - whether India's private reserves of gold automatically qualifies it as a corrupt nation - the inference is wrong. You will notice that our love affair with this yellow metal is a 2000 + year saga and continues unabated. It is a normal wedding gift here and now we even have Gold Mutual Funds to whet the appetite.

However what the article also shows is a Gini co-efficient that has crept into gold holdings. The richest Indians hold 20,000 tons out of 30,000 tons. Thats a huge concentration amongst the very few. How that is hoarded is open to question - however it could well be family heirloom + monetary hedging + smuggled gold too. Though one does not need to resort to Dubai / Swiss angle anymore as such Indians would rather hold these metals in those countries too.

In fact, I am surmising, that a lot of overseas gold held in bank vaults overseas too have indian ownership.

More power to us !!!

Anonymous said...

Yes, but of what good is this disproportionate amount gold in the hands of a private few? If it serves as a security blanket for generations to come only for a chosen few, it tantamounts to greed. How does that make India a rich nation and where is the power?




I never said that private gold will give India strength or rich.

I merely stated that India (Central Bank) has woken up too to the power of gold in these uncertain economic times. Gold is indeed the most liquid asset of all times across the globe.

However, on an inherent scale, many people owning gold has the effect of making India strong on a holistic level - by the sheer tonnage of metal that exists in the country. No, it will not alleviate poverty as I am no left leaning socialite, but heck better to be with this gold than without - and I mean sigma private gold for the country as a whole.

Anonymous said...

india should start investing heavily in PAKISTANI RUPEE instead of gold since its the stabillest currency around ROTFL

Anonymous said...

Great article, but, who gets to check whether the gold tonnage is not just gold plated bar of ...tungsten??

I smell a SCAM.

Anonymous said...

Wow to Anon above:

There has to be some better method to check the presence of tungsten in that case ....

But thanks for the above article.

Anonymous said...


A hand held xray spectrometer, freely available in the market place for about 15k euros can do the job very nicely, some models can even read barcodes :-)

Anonymous said...

To Anon above,

Knowing classic Indian lethargy, do you think RBI will allow each and every bar to go through proper screening or it will more of random sampling?

Knowing the Ethopian case, we cant take chances.

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