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The future of Asia is gold

Alasdair Mcleod, Goldmoney

 

 

I remember visiting India in the 1960s, when the gold price was about Rs 170 per ounce. Today it trades between Rs 85,000-90,000. For Indian families,owning gold has proved to be the best protection for their savings by far, a fact which has driven Indian governments over the decades to attempt to restrict or ban its people from buying gold.

 

It is a measure of the common sense of the Indian farmers, bazaar traders and other ordinary Indian people to understand that government currency is untrustworthy, and their wives and daughters’ gold jewellery is a far more certain store of value for the family.

 

The reason governments don’t like gold (and the Indian government is not alone in this) is it’sthe best money. Governments preferwe use their own unbacked currencies, because they can issue it freely. This allows a government to pay for things without raising taxes so thatno one notices how government spending is funded. But it does mean a currency’s purchasing power falls over time.

 

The Indian government has battled against private ownership of gold for decades. Lately, it has been marketing paper gold in the Sovereign Gold Bond Scheme. Presumably the intention is to replace public demand for gold with paper-gold, in the belief that gold imports are somehow ruining the trade balance. There is no stated intention to back this bond with physical gold, the bonds being only repayable in rupees. The government is selling gold liabilities to the public, which, if gold’s rupee price rises, will be paid for in more inflated paper currency.

 

These tortuous goings-on contrast with China’s attitude to its citizens owning gold. Instead of India’s gold policy of banning or trying to limit gold imports, China puts strict restrictions on the export of gold. Since 2002, China opened up gold ownership to everyone and actually advertised the benefits. Measured by deliveries from the Shanghai Gold Exchange’s vaults, the Chinese public has acquired some 17,000 tonnes, all of which is still in China.

 

It appears the Indian government now realises its gold policy is at odds with China’s, and also that of Russia. China and Russia are the leading nations behind the Shanghai Cooperation Organisation (SCO), which has evolved into an Asia-wide economic bloc covering over 40% of the world’s population, and which India has recently joined. Both China and Russia are selling dollars and have bought or are buying gold. It is clear to monetary observers that gold will eventually have a part to play in the SCO’s currencies.

 

India sees China driving a pan-Asian industrial revolution, involving the land and maritime silk roads and the links between them (India has partnered with Iran by developing the Iranian port of Chabahar). Pakistan is also involved, with the Chinese investing in its port of Gwadar. This represents an important opportunity for the whole Indian sub-continent, despite political differences.The Indian government has no alternative but to join in.

 

India’s anti-gold policy is therefore becoming a problem. Besides acquiring 200 tonnes from the IMF in 2009, India has only added a modest 15 tonnes to its gold reserves recently. At least, it’s a start, and rather than beg, borrow or steal its citizens’ gold, the government has recognised it must go into the market itself.

 

A new era for gold

India’s government is changing its gold policy, and it is surely influenced by the geopolitics of Asia. China’s government has been acquiring gold since it appointed the Peoples Bank of China to do so in 1983. The amount acquired since has never been disclosed but given the capital flows into China in the 1980-1990s and subsequent trade surpluses, prudent diversification from dollar surpluses suggests the amount of hidden gold reserves could be very significant.

 

 

At the same time, China has invested heavily in gold mining, and is now the largest mine producer by far at over 400 tonnes annually. Furthermore, the Chinese government retains a monopoly on refining, even importing part-processed gold doré for refining. The Shanghai Gold Exchange is now the largest physical exchange in the world, and through Hong Kong, Chinese interests also own the London Metal Exchange, which recently introduced successful precious metal contracts.

 

China’s commitment to gold is therefore beyond question. Russiahas also turned to gold to circumvent American sanctions. It has reduced its dollar reserves andaccumulated 2,065 tonnes of gold.After Italy, Russia has thesecond highest level of official reserves relative to the size of its economy.

 

The reason China and Russia are so keen on gold is they plan to eliminate dollars from their mutual trade as soon as possible. Only last Thursday, the South China Morning Post reported that China and Russia are actively working together to use their own currencies to eliminate the dollar, in response to the threat of further American sanctions.

 

What does all this mean for the ordinary Indian? India has an exciting future as an Asian powerhouse, in partnership with two powerful gold-loving nations. A financial tussle with the American dollar is already becoming centre stage, and India has insufficient gold reserves to protect herself from the fallout. The best protection from all the uncertainty of the rupee’s future in these circumstances is simple: own physical gold.

 

Disclaimer: Views are personal and not the views of the