IMF sells 200 tonnes of gold to India worth $6.7 billion

[Singh]

Very orthodox mentality, India should invest in many other assets as well not overwhelmingly in gold.

Do you have any proof that Indians or India is not investing in other assets ?

If one can predict (which is not possible) market then he can rule the world.

Do RBI and Indians citizens buy Gold for speculative purposes ?

By purchasing gold we are empowering the dollar.

How ?
If experts are to be believed RBI is buying Gold to hedge itself against a weakening dollar.

A economy importing more then exporting should consider such adventures wisely.

Why ?

oh yes! one question RBI is not buying gold for domestic consumers ?

is this rhetorical or are you genuinely unaware ? (hint see above)

 

[Singh]

India shows hedge-fund savvy with gold grab​

Barack Obama and Timothy Geithner must be as annoyed as they are bewildered.

Didn’t India get the memo? Developing nations are supposed to keep their excess cash in Treasuries, the US president and his Treasury secretary are no doubt thinking. Gold? That relic of the past that doesn’t pay interest or dividends and can’t be eaten? A fool’s game best left to the dinosaurs out there.

India is going its own way with a $US6.7 billion ($7.4 billion) gold purchase. The transaction turned heads in markets. It should do the same in capitals from Beijing to Washington.

India’s 200 tonne deal wasn’t huge considering how much gold central banks hold. It’s the symbolism that matters as the US struggles to keep the dollar’s slide orderly and panic- free. Consider India the vanguard of central banks more aggressively diversifying reserves away from US assets.

As markets brace for that inevitability, here are four things we can conclude from India’s gold rush.

One, the US dollar’s plight just got worse. Mounting US debt is bumping up against a dismal employment picture, a toxic mix that may get the attention of credit-rating companies. This US recovery looks to be a uniquely jobless one, complicating things for a president already grappling with two unpopular wars.

Dollar woes

That raises the spectre of even more stimulus spending, more bond issuance and more pressure on central banks to avoid a US dollar crash. It’s well-known that Geithner is relying on Asia to continue loading up on Treasuries. Even US Secretary of State Hillary Clinton found herself talking up the bond market in Beijing earlier this year.

Yes, talk of the US dollar’s death is overdone. There is still no obvious replacement. Yet Asia’s tolerance with falling US assets is evaporating. India’s gold grab from the International Monetary Fund’s bullion stash is the latest reminder of that.

Two, India’s got game. China doesn’t talk much about its currency reserves, yet you have to imagine a few top officials in Beijing are red-faced this week. “How on Earth did India beat us to the punch?” policy makers must be asking. China seemed the overwhelming favourite to get the first chunk of the gold the IMF is offloading to shore up its finances.

A question no one can answer yet is whether India will touch off a bidding war among central banks. Not that India cares all that much at this point. As it leapfrogs past Russia to become the ninth-biggest government holder of gold, China is now looking at even higher precious-metals prices.

Who’s next?

While India’s people are major gold hoarders, the government hasn’t been a big one. India really did display the savvy of a hedge fund here. It got what it wanted, surprised markets and will sit back and reap the benefits as gold rallies.

Traders are now betting on who will announce the next big purchase. Will it be China looking to employ its $US2.3 trillion of reserves? What about Japan, which has the second-biggest pile of currency? Or Gulf states working to end dollar hegemony? And let’s not forget about Brazil and South Korea. Well done, India.

Three, the IMF is back. The crisis of the last two years put the Washington lending institution back in business. Now it’s flush with fresh liquidity to help the nations that need it most. Along with getting top dollar for its bullion, the IMF managed to avoid shaking up markets.

Investors had been on edge following September 18, when the IMF approved the sale of 403.3 tons of gold. The concern was that a fire-sale might spook markets. Instead, the IMF’s first such sale in nine years managed to soothe them.

Reverting to the past

On November 2, Anoop Singh, the IMF’s Asia-Pacific region head, told me in Tokyo that the lender was redoubling efforts to help developing nations reduce imbalances and retool economies. A day later, after the gold sale was disclosed, his words made even more sense to me. Expect a busy and pro-active 2010 at the IMF.

Four, central banks are reverting to the past. Almost 100 years ago, John Maynard Keynes chided India for its “ruinous” love of the “barbaric relic.” Perhaps central banks were reading their Keynes over the last two decades, during which anti-gold sentiment pervaded.

The belief that inflation had been defeated made paper currency seem a safe and more practical bet than bars of gold collecting dust. The dollar’s swoon is prompting a bit of revisionist history, putting gold back en vogue. It says much about where the global financial system finds itself.

This gold revival has a clear geographic profile, too. Expect Asian central banks that took the whole “trust-the- Federal-Reserve-to-protect-the-dollar” hype too literally to be especially avid buyers.

If you are looking for the next big industry in Asia, it may just be manufacturing fortified warehouses. Many nations will need a Fort Knox of their own to store all those gold bars as the US dollar’s reign falters.

India shows hedge-fund savvy with gold grab

 

[Singh]

RBI may accumulate more gold to protect against a weak dollar​

UMBAI: The Reserve Bank of India (RBI) may move forward to accumulating more gold as the yellow metal is expected to shine in the years to come,
Forex Converter
Convert
Rs.To
an analyst with a broking firm said today.

"A weaker dollar could diminish the value of India's foreign exchange reserves and hence this could lead to further accumulation of gold by the RBI. This move will help India's central bank to hedge its downside risk on the foreign exchange reserves front," Angel Commodities Broking analyst Amar Singh said.

"India's gold holdings have dropped from over 20 per cent in 1994 to just 4 per cent," he said.

The RBI has purchased 200 tonnes of gold from the International Monetary Fund (IMF) for USD 6.8 billion. This move by the RBI is to diversify its foreign exchange reserves.

"We feel the RBI could move forward to accumulating more reserves as gold is expected to shine for years to come. The Dollar Index has weakened sharply and at the same time gold prices have gained phenomenally," Singh said.

"Prices of gold are expected to rise further and this has initiated the move by the RBI to diversify the foreign exchange holdings."

India is the world's biggest gold consumer and the RBI's move indicates the central bank wants to diversify its holdings to protect against a slumping dollar, he said.

RBI's transaction is equal to 8 per cent of the world's annual mine production. The sale by the IMF is the first in nine years and has lifted India to the ninth-biggest Government owner of the precious metal globally.

India held gold reserves to the tune of 358 tonnes till 2008 and this addition of 200 tonnes has raised the gold reserve holding by a whopping 55 per cent. This purchase by the RBI could support international gold prices, Singh said.

Gold is traditionally considered as a safe haven investment. This development could be positive for the gold market and the yellow metal could test new highs in the coming months. What can further add to the upside in gold prices is the move by Russian and Chinese central banks to purchase the yellow metal, he said.

Technically after gold prices crossed a high of USD 1,033 per ounce in March 2008, prices have continued trading higher. The metal is in a secular bull trend and the dollar index is in a secular bear trend. This further indicates that a weaker dollar could continue to support an upside in gold prices as it makes the metal look attractive for holders of other currencies, the analyst said.

Singh said the investment demand for gold is likely to rise on the back of higher demand from exchange-traded funds and high networth individuals. This rise will help compensate for the decline in consumer demand for jewellery and fabrication on the back of high prices.

RBI may accumulate more gold to protect against a weak dollar- Forex-Markets-The Economic Times

 

[hit&run]

We are talking here is like a multi billionaire capitalist and superficially for the sake of great national interest or achievement. It exactly right angle to other side of argument which more deeper and is concerned to a middle class Indian(still living in socialist democratic design) and long term National interest. It is good to see that our economy is growing fast, but are we growing mature as well. Can we see any connection of this investment (as many said here will help gold price downwards) with Indian consumer?

Do you have any proof that Indians or India is not investing in other assets ?

Other Commodities for domestic consumers not only Gold if i put it like this.

So India has surplus money to buy rest of the commodities, I was wondering buying gold will help the current prices of all commodities to go down in India. Higher prices of all commodities in India is the(layman) proof that we are not investing in other assets!(before i paste complicated links). Do you know the price of 1 kg moong lentil in India.

We buying gold purely to do profitable business when selling the same asset will compromise the prices withstanding to the fact that we have extensively boasted every where that we have more gold then anyone else.
Do RBI and Indians citizens buy Gold for speculative purposes ?

No, but why only gold that was my question.

So you know gold is better investment for citizens, and the same RBI will encourage (to rip off tax) to buy its reserves to domestic consumers to earn Just profit. Ask a small investor why he will not invest in commodities even the prices are increasing(you know if 1 L petrol in India is Rs.52, real cost of production is Rs. 20. Central govt. production duty is Rs.17. and State govt. put sales duty as is.15. so we pay Rs. 32 as tax. Think about it).
Every one in India is not a big investor(majority)like Mr. JIM ROGERS and specially a gold jewellery was never a good investment to purchase for the same.

If experts are to be believed RBI is buying Gold to hedge itself against a weakening dollar.

So we are joining the party with china!
How many dollars India has in her reserves will make effort laughable.

Why ? is this rhetorical or are you genuinely unaware ? (hint see above)

I have answered above.
you know about gold Shunting? Hint: how much quantity of gold is still imported in India (no one knows) I mean regulating market ?

It was better to show trust in dollar and directly increase our share in IMF(more then china) to play future big roles. Rather doing doing symbolic politics by helping IMF by overwhelmingly(please note Overwhelmingly) investing in a risky asset for short term benefit.

 

[Singh]

India, China and Gold​

The Reserve Bank of India in an off market transaction purchased 200 Metric Tonnes of Gold Bullion from the International Monetary Fund (IMF). Several things made this both interesting and market moving.

First, the magnitude of the purchase was surprising. Second was that they were not expected to make the purchase at all, analysts expected a large buy from China and the rest sold in market to the regular IMF Affiliate Banks. Lastly, they paid for it not in SDR’s or Special Drawing Rights as is the common practice when dealing with the IMF but in Hard Currency.

What did each of these things mean to the market and how will they affect the future?

1) The magnitude of the purchase.
Gold rallied over 3% on the day after this announcement. The fact that a sovereign bank was willing to pay top dollar for so much gold was very stimulative to the price.

2) India was not the buyer the analysts had picked for the purchase.
It is likely in light of this other sovereigns will follow, possibly China or some of the other Asian central banks. This will be a significant up force in the price of gold going forward. It is quite likely China, which has expressed an interest in moving away from the US dollar, may take this step. Additionally, political events related to trade conflicts recently may influence China to use this type of move to send a message to the US. The visit next week by President Obama may mitigate or exacerbate this possibility.

3) They paid for it in hard currency not SDR’s
This is much more subtle, and was much more difficult to analyze. The SDR’s are comprised of a basket of currencies as explained in the link in the reference section of this blog. India holds a large position of reserve currency, but it is comprised almost exclusively of US Treasury Securities and US dollars. So essentially they paid for this large cache of gold, which they are going to hold as a proxy for a reserve currency, in US Dollars.

This is tantamount to saying they would rather have gold than dollars. The immediate effect was twofold. First it caused the US dollar Index (USDX) to fall, and the price of the US Treasury securities, primarily the 30yr Bond, to fall. Second it stimulates the other sovereigns to do the same thing to avoid being caught holding a US dollar or Treasury that is declining in value. While this has not as far as we know happened yet (The IMF doesn’t announce the sales until they are completed and the India purchase did not leak out ahead of the announcement) it caused enough fear in the market to cause the dollar to reverse it’s recent uptrend and drop. That drop is continuing.

Broader Market Effects
The value of the dollar effects the value of things that are denominated in dollars. US Treasury Securities, Equities, and Commodities. As the dollar loses value the price of US Treasuries goes down, and Equity and Commodity prices rise. As a result we saw a rise in Crude Oil prices and a large rise in Gold prices. Crude as a result of first order effects (dollar value decreasing) and Gold as a result of first and second order effects (Increased demand).

Longer Term Effects and Price going forward
The price of US equities will see decreasing effects of this event unless another similar event as describe above takes place. The effect on Crude will be subsumed by the normal supply demand effects and/or any disruptive event. The effect on Gold and US Treasury prices will be effected to a greater degree as the up force on gold of such a large purchase, and the implications for US Treasuries of such a vote of “no confidence”, will in my opinion be long lasting, and again should a second or more sovereign banks engage in the same type of transaction there will be an exacerbation of these effects that could be greater than a linear effect.

Some Ancillary Comments
In the research of this piece, I found that the mainstream media either elected not to mention the fact that the purchase was made in hard currency, or in fact stated outright that SDR’s were used, even though the conference call clearly included that statement, and no media outlet I could find stated the makeup of the hard currency that was used. Obviously the market knew the facts or correctly surmised it as the price of gold and equities was positively affected by the news, but the media totally missed what in my mind was the critical factor for the markets.

India, China and Gold -- Seeking Alpha

 

[Singh]

H&R,

If only you would've cared to read the various articles-blogs I posted.

1. RBI has not bought Gold for domestic consumers but as a reserve.
2. Commodity prices are driven by prevailing market forces. For eg. Fall of Copper inventory levels in London would drive up prices, Failure of Monsoon would drive up prices of Wheat.
3. India has a forex reserve of over 250bn$ .
4. India bought Gold in hard cash(U$) which means we wish to diversify risk and don't trust U$ to hold on.
5. Indian citizens privately own more than 60 times as much Gold as RBI and 20-25% of all Gold above ground.
6. US Banks have 16 times as much Gold as RBI has.
7. Indians generally don't buy Gold as an equity investment.
8. India is not following China, but setting a precedent. China incidentally is world's largest producer of Gold @ 275 tonnes per annum
9. Indians import 400tonnes of Gold annually that is roughly 25% of all Gold produced per annum.
10. India alongwith other nations wishes to shift away from U$.

 

[hit&run]

H&R,

If only you would've cared to read the various articles-blogs I posted.

1. RBI has not bought Gold for domestic consumers but as a reserve.

Precisely this is what is was trying to say, Please read my posts i was answering those who were directly relating this to domestic prices of gold.
2. Commodity prices are driven by prevailing market forces. For eg. Fall of Copper inventory levels in London would drive up prices, Failure of Monsoon would drive up prices of Wheat.

Gold is not an exception, so why we are are jumping in celebration that is the point.

See the LME price graph for gold from 1980-1985. It fluctuates just like everything else, and quite significantly. In the long term, it doesn’t appear much better either, shown in the the 1975-present graph. At a $250 to $850 increase (1978 – 2008) over 30yrs works out to only 4.1% annually, less than a savings account (3%-5%) and less than the increase in the general price level of the S&P (8%)

3. India has a forex reserve of over 250bn$ .

And china?

4. India bought Gold in hard cash(U$) which means we wish to diversify risk and don't trust U$ to hold on.

Don't you think Global financial crisis is over?

5. Indian citizens privately own more than 60 times as much Gold as RBI and 20-25% of all Gold above ground.

And all world central banks can keep the pace with consumption of gold for next 35 years if tomorrow all mines will stop bringing gold below ground above. So long term investment is out of question till date.

6. US Banks have 16 times as much Gold as RBI has.

That was good to know, so US can nab us when she will open her Gold Tap. Furthermore we are still developing country it is wise to invest more in infrastructure then over overtly on gold.

7. Indians generally don't buy Gold as an equity investment.

I have purchased and sold kilos of gold myself i know it is a bad investment.
The standard policy of people all over the world who mistrust their currency has been to buy and hold gold. In the past 35 years the price of gold in the open market has advanced $35 per ounce to $48 in early 1972– a rise of only 35%. But during all this time the holder of gold has received no income return on his capital, and instead has incurred some annual expense for storage, decay, theft, insurance etc. Obviously,one would have done much better with his money at interest in a savings bank, in spite of the rise in the general price level. The near-complete failure of gold to protect against a loss in the purchasing power of the dollar must cast grave doubt on the ability of the ordinary investor to protect himself against inflation putting his money in “things”.”

8. India is not following China, but setting a precedent. China incidentally is world's largest producer of Gold @ 275 tonnes per annum.

India is confused and trying to see things through chines majboori binoculars and immature, this what she is signaling.

9. Indians import 400tonnes of Gold annually that is roughly 25% of all Gold produced per annum.

I was thinking you too believe that RBI purchase is for domestic consumers after your 1st reply.

10. India alongwith other nations wishes to shift away from U$.

^^8th and 10th point: may be you are right but i think we are responding to knee jerk reaction of Global financial crisis. We should wait or what other options we will have other then USD. None i think.

 

[Singh]

1. I am sorry I missed the part about domestic price of Gold and RBI acquisition?

I was the 1st one to point out that Gold has given a negative RoI since 1985 onwards. Irresp one has to properly understand why has this been so. Buy Gold: What Happened to the Gold Price in 1980?

Gold reserves (or gold holdings) are held by central banks as a store of value.
Why central banks hold gold > World Gold Council, gold as a Reserve Asset.

4. Yes Global Financial Crisis is not over hence this very very smart move by RBI to diversify.

6. You are confusing Infrastructure Investments with diversification of Forex reserves. India has 250bn$ in foreign currency which can be leveraged by the govt at any time it wishes too. India merely converted 6.7bn$ into equivalent Gold reserve as it is bearish on U$.

7. Gold as an investment is usually bought in times of economic crisis and recession. Gold prices zoom during times of global crisis like in 1980 and currently. And research a bit more before buying and selling kilos of Gold next time.

8. How ? Seriously not read the links ?

9. This statistic is for bullion imports for domestic private consumption. Jewellers, Industrial application etc.

---

 

[hit&run]

1. I am sorry I missed the part about domestic price of Gold and RBI acquisition?

I was the 1st one to point out that Gold has given a negative RoI since 1985 onwards. Irresp one has to properly understand why has this been so. Buy Gold: What Happened to the Gold Price in 1980?

What a Irony that after 1980 it is again profitable to invest in gold.

Gold reserves (or gold holdings) are held by central banks as a store of value.
Why central banks hold gold > World Gold Council, gold as a Reserve Asset.

Good for nothing link, it does not explain what happens when reserves are jettisoned.

4. Yes Global Financial Crisis is not over hence this very very smart move by RBI to diversify.

6. You are confusing Infrastructure Investments with diversification of Forex reserves. India has 250bn$ in foreign currency which can be leveraged by the govt at any time it wishes too. India merely converted 6.7bn$ into equivalent Gold reserve as it is bearish on U$.

No i am not, you are trying to compare US with India and making it as a one way argument that investing only in gold will diversify forex reserves. By ignoring the fact which i mentioned before that US is still capable of controlling the price of Gold by opening her gold taps

7. Gold as an investment is usually bought in times of economic crisis and recession. Gold prices zoom during times of global crisis like in 1980 and currently. And research a bit more before buying and selling kilos of Gold next time.

8. How ? Seriously not read the links ?

9. This statistic is for bullion imports for domestic private consumption. Jewellers, Industrial application etc.

A market which is extremely difficult to regulated(black money etc.) so worth not to be boasted about on Int. Forums.

---

For me what i read recently in OZ GFC is over so in US. US is not going to declare until 2011.(I will explain late; at job now). It was better to diversify reserves before times of E crisis not after.

No body plan to buy and sell in India with family responsibilities.Unfortunately I bought when there was enough money. i sold it when i needed money for more important things then gold. Now i have less then 10 grams cause i invested on my and my wife's overseas education after massive losses. I was better off investing in real estates then this metal. (I don't think you have ever sold gold).

 

[Rage]

It's reported in Chinese media that private Indians own more than 15 thousand tones gold or goldwares. That's pretty impressive. When gold price goes up to 1500USD per ounce next year they are at least 50% richer. It's a good buy for Indians.

2008 figures put that at some 17,000 metric tons of gold in the hands of private individuals, corporations and trusts, large agglomerates of which exist in the form of temple holdings and temple trust assets [infact, the Venkateshwara temple in Andhra Pradesh is presumed to be the 'world's second richest place of worship' after the Vatican; in September this year, media reports suggested that a priest, who was a custodian of the temple jewelry, was arrested after an allegation was made by one of the petitioners that 'small fraction' of the temple's inventory was missing: to the tune of some 500 billion Rs. ($ 14 billion): gold coins, gold and silver bars, gold and diamond-studded ornaments are regularly dropped in 'hundis', small metal boxes for offerings]. Infact, the March 2008 issue of the National Geographic had an issue on how Indians, particularly those in the South in the state of Kerala and Tamil Nadu, have this curious fascination for gold, and everything that glitters.

 

[Rage]

So I guess you punks were right.

x-x-x-x


Golden sale heralds an economic force

Published on Wednesday, Nov. 04, 2009 12:00AM EST
Last updated on Friday, Nov. 06, 2009 2:56AM EST

A surprise move to snap up $6.7-billion (U.S.) of gold underscores India's economic ascendance and marks the strongest indication yet that the central banks of Asia's fast-growing nations are turning away from the U.S. dollar as the world's reserve currency.

The price of gold leapt to an all-time high as the decision to purchase 200 tonnes of gold from the International Monetary Fund highlighted the resilience of India's economy while laying bare a growing loss of global faith in the value of the U.S. dollar.

Already the world's largest gold importer to fuel its massive jewellery consumption, the gold deal marks a major milestone for India and its standing in the global economy.

Gold hit a record $1,088.50 (U.S.) an ounce as investors bet that Asia's emerging economic powers will buy more of the precious metal to diversify their foreign-exchange reserves against a weakening greenback."We have money to buy gold. We have enough foreign-exchange reserves," Pranab Mukherjee, India's Finance Minister, told reporters yesterday.

While India has enjoyed relatively strong economic growth in the past year, "Europe collapsed and North America collapsed," Mr. Mukherjee said.

“ The Indian government has recognized it has a huge
U.S. dollar reserve pot and the domestic interest may be to have more gold. ” — ​

DundeeWealth chief economist Martin Murenbeeld​

Less than two decades ago, a crushing financial crisis forced India to physically ship its gold reserves to London as collateral for an IMF loan. Now, with an economy that is expected to grow by 6 per cent this year, India is helping the IMF shore up its finances by buying a big chunk of the organization's gold.

"The Indian government has recognized it has a huge U.S. dollar reserve pot and the domestic interest may be to have more gold. There is a certain amount of confidence that comes with gold, particularly in India," said DundeeWealth chief economist Martin Murenbeeld.

Western central banks have hoarded gold for years as part of their foreign reserves and now India and China are emerging as significant bullion buyers as they try to spread out their exposure to U.S. dollar-denominated investments such as bonds and treasury bills.

"As these countries are growing and becoming more important players, they are recognizing the value of defending your currency and having it backed, to a certain amount, by gold," said Charles Oliver, a portfolio manager with Sprott Asset Management Inc.

India's move also amounts to a bullish call on the long-term price of gold. India paid the IMF $6.7-billion (U.S.) to increase its gold reserves to 557.7-million tonnes from 357-million tonnes. Gold now accounts for about 6 per cent of India's $285.5-billion in foreign-exchange reserves, up from 4 per cent.

“ As these countries are growing and becoming more important players, they
are recognizing the value of defending your currency and having it backed,
to a certain amount, by gold.”—

Charles Oliver, Sprott Asset Management Inc.​

That's still relatively low compared to most European countries, where gold makes up about 15 per cent of reserves. Despite Canada's status as a major producer and home to some of the world's largest gold-mining companies, gold accounts for less than 1 per cent of Canada's reserves.

India is already the world's largest consumer of gold, accounting for about 20 per cent of global demand. It imports between 700 and 800 tonnes every year for use in jewellery.

As recently as 1994, gold accounted for more than 20 per cent of India's foreign reserves, but the South Asian country's increasing investments in U.S. treasuries and other greenback- denominated securities diminished gold's standing in the portfolio.

India's decision to purchase half of the 403.3 tonnes of gold the IMF put up for sale in September surprised many gold-market observers. China, whose $2.2-trillion in foreign reserves are the world's largest, was widely expected to snap up the bullion.

China has increased its gold reserves by 76 per cent since 2003 to 1,054 tonnes. It has publicly stated its intention to diversify its foreign-exchange reserves with investments in "hard assets," including commodities such as copper, oil and gold.

Gold currently accounts for only 1.7 per cent of China's foreign reserves, making it a front-runner to buy the remaining 200 tonnes of IMF gold still up for grabs.

"Who buys the rest of the IMF gold? We suspect it may be China, other Asian countries, Russia or even India again, as they hold relatively little gold relative to their very large FX reserves, and may want to diversify away from the U.S. dollar," Bart Melek, global commodity strategist at BMO Nesbitt Burns, said in a report.

India's willingness to buy a massive amount of gold near record prices helped the bullion price smash through its previous all-time high of $1,072 an ounce, hit last month. Gold for delivery in December touched $1,088.50 an ounce in New York yesterday.

"Gold is sneaking back into some kind of a role in the international monetary system ... the central bankers are indicating, particularly ones that have large amounts of foreign-exchange reserves, that they are very comfortable holding such a historic asset as gold," Mr. Murenbeeld said.

***

The gold standard

Percentage of total foreign reserves held in gold, by selected countries

U.S. - Gold, in tonnes 8,133.5

France - Gold, in tonnes 2,445.1

Germany - Gold, in tonnes 3,408.3

Italy - Gold, in tonnes 2,451.8

Netherlands - Gold, in tonnes 612.5

Switzerland - Gold, in tonnes 1,040.1

European Central Bank - Gold, in tonnes 501.4

India - Gold, in tonnes 557.7*

Russia - Gold, in tonnes 568.4

Japan - Gold, in tonnes 765.2

China - Gold, in tonnes 1,054.0

Canada - 0.2 % Gold, in tonnes 3.4

*Adds 200 tonnes to India reserves

THE GLOBE AND MAIL / SOURCE: WORLD GOLD COUNCIL, SEPTEMBER 2009


Golden sale heralds economic force - The Globe and Mail

 

[ppgj]

cross posting and relevant.

The $ reserve currency conundrum

9 Nov 2009, 0400 hrs IST, U R Bhat,

With India purchasing of 200 tonnes of gold from the IMF for US$ 6.7 billion last week — a far cry from the 67 tonnes of gold that India had to
humiliatingly pledge in 1991 to stave off an imminent forex crisis — the debate on the need to diversify the forex reserves of the surplus countries has gathered fresh momentum.

Some developing countries have argued that the pain of structural adjustments in their economies consequent to the global financial meltdown has been felt more by countries other than the US because, unlike others, the US can pay for its massive imports in its own domestic currency. This is facilitated by the pre-eminent role of the dollar as a global currency that is held as reserves by countries with surplus trade balances.

China has been known to be actively diversifying away from the dollar over the last few months by investing in strategic holdings of non-ferrous metals and oil wells abroad but with nearly $2 trillion in foreign currency reserves, it has not much of an option but to participate in the process of adjustment in the global balance of payments in order to ensure the safety of its massive financial claims on the rest of the World.

Over the last few months discordant notes have been emanating from several countries holding large dollar reserves questioning the special safe haven status enjoyed by the dollar and the inability of the US as the issuer of the global currency to maintain its value. With the dollar depreciating by upwards of 20% vis-à-vis the major currencies — euro, yen and British pound since the onset of the global financial crisis, there is an urgent need to arrest the falling value of the dollar reserves of the reserve holding countries.

Being the issuer of a global currency is indeed a special privilege enjoyed by the issuer country but along with this privilege comes the possibility of running large current account deficits because of the requirement to supply large quantities of the currency.

There is the additional consequence of a potential loss of export competitiveness on account of the possible appreciation of the currency if it
becomes a popular reserve currency. There are understandably limits to current account deficits and currency appreciation that the issuer country can sustain and this is the reason why other currencies have not been able to significantly displace the dollar as the global currency of choice. With the increasing role of China in international trade, the renminbi can become a reserve currency over time but this will require the country to abolish capital controls and allow its value to be determined in the free market that will inevitably lead to the weakening of the vice like grip of the Chinese government on its economy.

Russian President Dmitry Medvedev has recently presented an interestingly different perception about the state of the world stating that the artificially maintained unipolar system was based on one big centre of consumption financed by a growing deficit and thus growing debt, one formerly strong reserve currency and one dominant system of assessing assets and risks. He went on to castigate the US military presence across the world stating that it survives on what is effectively a massive subsidy by the rest of the world while the US continues to appropriate the exports, companies and real estate of the rest of the world in exchange for paper money of questionable worth.

While it is easy to dismiss the perception as Communist propaganda there is certainly more than a grain of truth in the rather provocative interpretation of the state of the unipolar world. There is no denying the fact that the global financial meltdown of the last two years is largely because of the simple fact that the unbridled consumption by the US and its citizens has been going on unchecked for an unsustainably long period.

It is worth recapitulating the process by which the global economy currently finds itself in dire straits. Unbridled consumption by US citizens, US buyouts of foreign companies and the massive US military spending across the World — all paid for in the domestic currency of the US — find their way ultimately to the foreign central banks of the countries that have balance of payment surpluses. These dollars are effectively recycled by the central banks back to the US when they invest in “safe” financial assets like US treasury bonds.

The other alternative for these surplus countries is to let their currencies appreciate in the free market relative to the Dollar with negative ramifications on their export competitiveness, the health of their export intensive businesses and unemployment. As long as the export surplus countries continue to hoard dollars which is effectively US IOUs, despite being the world’s largest debtor country, the US does not have to undergo IMF style “structural adjustments”.

The standard prescriptions under ‘structural adjustment programmes’ are tax and interest rate hikes, currency devaluation, reduction in trade and fiscal deficits, pruning social safety nets, selling government-owned enterprises and natural resources, etc., to the satisfaction of pressing creditors. However, it is surprising to note that the US response to the financial crisis over the last two years is at complete variance to the “standard” operating procedure in a structural adjustment programme.

Indeed, to the lay observer it appears that the global reach of the mighty military prowess of the US sits rather uncomfortably with the perceptible decline in its economic strength. These apparent contradictions would possibly take decades to get reconciled but history has been witness to many events that appeared incredulous when the first undercurrents were visible.

The fall of the once mighty British pound as a reserve currency between the two World Wars, a defeated Japan in the second World War becoming an economic powerhouse, and more recently, the leap of Communist China from utter poverty to relative prosperity — all in a few decades — are examples worth recalling. It is therefore reasonable to prophecy that the longer the US continues to live off the savings of others, the more likely it is that the laws of economics would catch up with it some time.

The $ reserve currency conundrum- Opinion-The Economic Times