India Feeds its Hunger for Gold

“The Financial World According to Inya” Column,
by Inya Ivkovic, MA

It seems India did not get the memo that central banks of developing nations are to keep their cash set aside for buying Western financial assets and not spend it elsewhere. Does India not realize that developed nations can no longer spare free cash, unless they print some, which is not such a great idea now? And what is India doing hoarding gold? Does India not know that gold is a dinosaur among financial instruments that pays no interest, no dividends and just sits there, like the lump that it is?

Apparently not. India went against the grain in early November and bought a whopping $6.7 billion worth of gold from the International Monetary Fund (IMF). The size and timing of the transaction turned many a head in financial and capital markets around the globe.

Truth be told, India’s $6.7-billion worth of gold, or some 200 metric tons, is not that big a deal for Washington. It is more the symbolism of the deal that rubs the U.S. the wrong way. As the U.S. dollar keeps on sliding, India is just one of forerunners among countries trying to diversify away from U.S. assets. The world is pondering the possibility of a shift towards a new world order. Here are the lessons we can learn from India’s unexpectedly developed appetite for gold.

First, the ride ahead for the dollar is only going to get uglier. The U.S. debt is mounting and the labor market appears beyond repair. In the post-recession warped reality, this can only mean more economic stimuli and more U.S. treasuries being shoved down Asia’s throat; everything and anything just to avoid the dollar crashing. I think this dollar trash talk is a bit over the top, actually, because there is no real substitute for the dollar yet on the horizon. However, the fact remains that Asia’s patience with the rapidly declining in value U.S. assets is growing thin and India’s gold grab is just one more piece of evidence of that fact.

Second, India seems to be on top of its game. The Chinese were frontrunners in grabbing the first chunk of IMF’s gold, not India, so being beaten to the punch must be embarrassing for a nation used to being the first and best in everything, including what to do with its own finances. And where did this move come from? Unlike its own people, India’s government has never before demonstrated too much interest in gold, until recently, when it pulled a really savvy, hedge-fund-like move. India got almost half of the IMF’s gold. It has taken everyone by surprise and all it has to do now is absolutely nothing; just sit back, relax and reap the benefits as the gold rallies.

Third, the IMF is back in business after the crisis of the last two years and it is flush with money and itching to spread the goodness around. The IMF could not have picked a better time to get top dollars for its gold, all the while trying to avoid disturbing the bullion market too much. When the IMF announced mid-September that it will start unloading over 400 tons of its gold, the goldmarket was up in arms worrying about the effects such a fire sale would leave in its wake. But the IMF’s first sale in almost a decade was pleasantly uneventful for all market participants.

Four central banks have finally travelled forward in time, it seems. Almost a century ago, it was John Maynard Keynes who berated India for its “ruinous love of the barbaric relic.” Perhaps this is where Keynes-loving central bankers got their “clue” to insist on anti-gold sentiment for so long.

I find it truly amazing how few people think of inflation these days, or how many of them believe inflation has been not only subdued, but also beaten, perhaps permanently. This is why paper currencies have appeared safe and more practical than dust-collecting, boring old gold bars. It may seem that the only reason gold is back in vogue is the dollar’s ugly swan’s song, as it plummets to its death. But it may not be the only reason.

Gold has gained a huge geographic profile. Asian central banks know exactly in what kind of a pickle they find themselves with billions of U.S. assets in their treasuries. So, it is a no-brainer to expect that Asians are likely to become avid gold-buyers. Chances are, the next booming industry in Asia will be building “Fort Knoxes” to store and guard all the gold that is likely to end up in that corner of the world and literally and metaphorically tilt the scales in its favor.