Indian Gold Reserves. Forgotten History! Lost Opportunity?

Quiet Progress

For the last 20 years, World Gold Council has shown Indian gold consumption rising from 400 tons (1987) tons to 800 tons (2007). Estimated Indian gold reserves at 25,000-30,000 are double of the next largest country - the USA with 14000 tons. India has 20% of the world population and also 20% of the world’s above-the-ground gold.

India and the World

For much of the last 2000 years, India has been the largest buyer of gold. Pliny, the Roman historian lamented, 1800 years ago, how India, the sink of precious metals, was draining Rome of gold - an appellation that resonates even today. The early Christian saint John Of Ephesus predicted that Roman love of Indian spices (paid for in gold) will be the reason for Roman downfall.

To “manage” this drain of gold, Romans started cheating the Indians. They reduced the gold content in coins. Septimus Serverus, (193 AD-xxx) further debased the currency. Indians just stopped accepting the debased coin - and demanded payment in pure gold. Central Asian invaders, for gold, aimed at the सोने कि चिडिया (loosely the ‘golden goose’) - and they well succeeded.

Baron de Montesquieu in 1748 warned Europeans that “…Every nation, that ever traded to the Indies, has constantly carried bullion, and brought merchandises in return… commerce of the Romans to the Indies was very considerable … this commerce was carried on entirely with bullion … They want, therefore, nothing but our bullion, to serve as the medium of value, and for this they give us merchandises in return … that bullion was always carried to the Indies, and never any brought from thence. Ian Fleming pitted James Bond against Auric Goldfinger - who was smuggling gold out of a declining, post-war Britain into India.

During various collapses of temporary gold standards in history, Indian gold reserves (usually unwillingly) stabilised world economies. In recent history, Indian gold reserves went out to stabilise the American currency during the Great Depression and the German currency during the post-Weimar drift. Indian silver reserves broke the Hunt Brothers’ back and their silver gambit in the 1980’s.

The Pre-WW2 Currency Crisis

After (colonial) India’s accession to the world gold standard in 1898, India rapidly built up a export surplus - and British reserves of gold started drying up - in spite of gold export restrictions to India by the USA, Britain and much of the Western world. There was hysteria in popular press and politicians on the subject of India and its appetite for gold. To overcome this payment crisis, it was decided to pay India in silver released by the Pittman Act. Subsequently, even payments in silver became difficult. India then started getting paid by Bank Of England credit notes.

By WW1 end, it was evident that sooner rather than later, India would obtain dominion status. Between 1920-40, in a series of measures, it was decided to reverse this policy. Central bankers from the USA, Britain, France and Germany had many meetings to “coordinate monetary policy.” The agenda - gold flow management between themselves and an obvious understanding - dont let the browns get all the gold. They (Hjalmar Schacht, Governor, Reichsbank, Charles Rist, Deputy Governor, Banque de France, Benjamin Strong, USA Federal Reserve, Montagu Norman, Bank Of England) agreed that Indian demand for gold had a “…deflationary effect on global liquidity,”" therefore Indian demand for gold had to be regulated.” So, while the West consumed Indian production and goods, they regulated Indian demand for gold!! The result - Bengal Famine of 1943 which killed 40 lakh Indians. As Gideon Polya has pointed out, Australian sheep have lower mortality rates.

Like much of Western history, the British (Lord Willingdon, Montagu Norman, Winston Churchill (as the Chancellor of the Exchequer), Neville Chamberlain) executed a scorched earth policy in India. (After all what is brown life worth?) They implemented a series of economic and administrative measures that killed millions in the Bengal Famine would impoverish India - and sustain the empire.

Montagu Norman, Winston Churchill (then the Chancellor of the Exchequer) returned to the gold standard - with the famous prediction by Keynes that this action would result in a world wide recession - of which much came to pass. Churchill confessed “I’m lost and reduced to groping,” but went along with Montagu Norman, united by their racism.

On October 27th, 1931, the Ramsey Macdonald led “National” Government (Conservatives and Liberals coalition, fearful of the rising Labour Party) in Britain won a huge majority of 554 MPs of 615. The economic crisis of September (misnamed as the Indian Currency Crisis), ensuing Depression era problems in the US, the Weimar Republic problems - and other issues pushed this ‘National’ government to ram through a series of measures (page 130-131) that depressed silver prices, inflated gold prices and raised interest rates in India.

Done over the protests by Gandhiji, trade bodies and merchants and threats of resignation by the Viceroy and his Executive Council , the resulting ‘money famine’ (page 155) had the Lord Willingdon ecstatically say ‘… Indians are disgorging gold … (page 156). Indians have a different reason to revile Neville Chamberlain who with great satisfaction said “…The astonishing gold mine that we have discovered in India’s hordes has put us in clover …”after impoverishment of the Indian serf.

The Nixon Chop

On August 15th, 1971, President Nixon after a two day huddle with 15 advisers at Camp David, delivered the Nixon Chop to the world. The Nixon chop (my name for this event), one month after his China breakthrough, cut the convertibility peg of US$35 to gold as US gold reserves were severely depleted. The French had been regularly redeeming gold for their dollar earnings - and for this ‘perfidy’ the US had not forgiven France. This was much like the pre-WW2 French methodology of devaluation, new peg, old debt for new gold routine which got the US hackles up. Many decades have passed since these redemptions by France, and the new French President, Sarkozy believes it is now possible to renew US-French relations again.

On the opposite side of the world, a beleagured Indian Prime Minsiter was celebrating 24 years of Independence with a “ship-to-mouth” economy, dependant on PL-480 grain. Private gold reserves in the Indian economy after nearly 25 years of post-colonial rule, were steadily rising. Over the next 10 years, the western world (and most of the rest) blamed OPEC for post-1971 inflation, gold scaled US$800 an ounce; the Hunt Brothers launched their bid to corner the silver market; stagflation made an entry and Soviet power grew. Nixon Chop , itself the result of many years of gold reserves erosion, was one in many steps that brought the US$ to its knees.

So, why this desperate poverty

With global monetary system in a flux and the decline of the dollar (especially after the Plaza Accord), gold prices outlook and its importance has been rising. After the Nixon chop, at an estimated 15,000-18,000 tons, India was in a position to create instruments, obtain leverage and create wealth from the world’s largest gold reserves.

It is the failure of the Indian economic minds - that they have not found any instruments and means, 35 years after the Nixon Chop - and with Indian gold reserves approaching 30,000 tons mark. Some other countries tried feebly, and failed. Japan and Asean tried setting up the Asian Monetary Fund - after 1997, currency crisis - and were arm twisted by the US to drop the idea.

Is the US likely to give up the central role?

Unlikely!

Let me correct myself! Pretty damn unlikely!!

Will the Western world share its pre-eminence with Japan, China and India. Bet your bottom yuan, yen, rupee or gold - they wont. Especially since the Anglo Saxon Bloc control nearly 80% of world gold production.

What are they likely to do! Some of the older measures by which gold was transferred from the old (and the new) world to Western world are no longer possible.

But if any central bank (or monetary authority) were to: -

1. Mask purchases
2. Build up gold positions
3. Take physical possession of gold (Avoid Czech Gold, Montagu Norman & BIS Scam)
4. Look at a positive outcome to a war scenario

then that country will be able to bolster their gold reserves position by: -

• About 10,000-15,000 tons
• Limit the cost of purchase
• Make it economically unviable for anyone else to match them

The only country that can (currently) match these criteria is the USA - and China.

The US GATA Committe has been running a low profile campaign on gold price manipulation. This attempt, if successful, at increasing gold prices will possibly make it difficult for Indians to buy gold in larger quantities. The Indian Central Bank, preoccupied with a developmental agenda, is in no position to take up this challenge.

From An Indian Standpoint

While the silver lining is private reserves, we have a blinkered RBI & GOI response. India has one of the lowest monetary reserves of gold in the world. Against a global average of 10.5% RBI holds only 3.4% of its reserves as gold. The EU holds 40% of its reserves in gold and USA - 70%.

And while the RBI & GOI gently sleep, the Chinese have grown their gold purchases. China has become world’s 3rd largest consumer of gold - up from a 100 tons to 350 tons. Shanghai Gold Exchange has made it easier for individuals to invest in gold by reducing the transaction size from 1 kg to 100 gm.

Importantly: -

1. Is India in a position to militarily defend these reserves
2. Does the GOI and the RBI have any strategic intent vis-a-vis gold

Making the job easier for the GOI and the RBI are Indian economic habits of the centuries that have allowed this build up of gold reserves.

India today stands at a historical cross road. Are Indian economic and political minds at work to exploit this window of opportunity. Or will it be a wasted chance.