2ndlook

Gold drops over $77, posts monthly loss

Posted in Current Affairs, Gold Reserves by Anuraag Sanghi on March 1, 2012


As gold prices recovered from December lows, to 3-month highs, there was ‘news’ that ‘someone’ dumped some gold. No surprise.

On February 29th, 2012

Gold advanced to a three-month high and silver posted its biggest gain in eight weeks as investors bought precious metals as an alternative to a weakening dollar. Platinum and palladium also rose.

Gold futures for April delivery advanced 0.8 percent to settle at $1,788.40 an ounce at 1:30 p.m. on the Comex in New York, after climbing to $1,792.70, the highest level for a most- active contract since Nov. 14.

Prices are up 14 percent this year after a 10 percent increase in 2011, the 11th consecutive annual gain, as investors sought to diversify from equities and some currencies. The dollar index has declined 1.2 percent this month while gold advanced 2.8 percent. (via Gold Leads Precious Metals Rally on Investor Demand for Dollar Alternative – Bloomberg).

And the next day, on March 1st, 2012

Gold fell 5% to below $1,690 an ounce on Wednesday for its biggest one-day drop in more than three years.

Gold fell nearly $100 and silver was down $3 from session highs. Losses started to snowball at (2030 IST).

Trading volume exploded when speculation about an unusually large sell-order ran rampant. Option traders said funds were heavy buyers of puts to protect against further losses.

Wednesday’s sell-off wiped out gold’s gains from earlier in February, and the metal ended the month with a 2.5% loss for its second decline in three months.

Earlier in the session, bullion touched a 3-1/2 month high at $1,790.30 after the European Central Bank completed offering cheap loans worth over half a trillion euros to banks.

Spot gold fell below its 150-day moving average for the first time in a month.

Analysts said the next important resistance level is $1,650 an ounce, where the metal found support during its last sell-off in late January.

Funds were heavy buyers of December $1,500 put options as some looked to profit and others tried to protect further downside risks in futures, said Jonathan Jossen, a COMEX gold options floor trader. (via Nymex gold down 5%, biggest 1-day drop in 3 yrs).

It was said that

in afternoon dealings, gold was also hit “by a large sell order on Comex, said to have been 1 million ounces (or 31 tonnes) prompted by the Bernanke testimony,” said Ross Norman, chief executive officer at London-based bullion broker Sharps Pixley. (via Gold drops over $77, posts monthly loss – Metals Stocks – MarketWatch).

Mainstream press manufactured some explanation.

Financial journalists were quick to talk about the “disappointment” that Bernanke didn’t discuss detailed plans for QE3, but that doesn’t make much sense. This bullish pattern was not unfolding merely on speculation that QE3 was imminent. There just really wasn’t anything all that remarkable from the Fed chairman on Wednesday, and certainly nothing to trigger this type of sell-off.

The Wall Street Journal ran a story called “Market Roiling Trade Likely Not ‘Fat-Finger’ Error” that discussed how an order to sell 100,000 treasury futures hit the market just minutes after Bernanke started speaking. This could have caused a cascade effect that knocked other algorithmic and high-frequency trading platforms into chaos, including programs linked to currencies, and therefore, to gold.

There was also a rumor that JP Morgan sold — shorted? — a million ounces of gold all at once for an Asian fund, which is 10,000 futures contracts. That is a HUGE order, and that kind of size just cannot be readily absorbed by the gold market. I’m not a gold conspiracy theorist, but it does make you wonder after this type of sudden drop.

One of the really interesting things about Wednesday was how the carnage was for the most part limited to gold and silver. (via Fractal Gold Report: Flash Crash).

Related articles

Arab Spring – Is the West After Gold?

Gold Prices – Blip, Dip or Flip

Why are gold prices going down?


Advertisements

Why are gold prices going down?

Posted in America, Business, Gold Reserves, politics by Anuraag Sanghi on December 18, 2011

The story behind the gut-wrenching US$300 drop in gold prices.

Many ways to skin a cat

Under the guise of ‘modern’ economics, some fundamental truths have not been remembered, over the last 50 years. Importance of gold in the world monetary system is one of these ‘forgotten’ truths.

This has damped down gold prices – and printing presses have been busy printing money. Especially in the last 40 years – after the Nixon Chop.

24 hour coverage of financial markets has also created an impression that financial cycles play out in a matter of hours and days. So also, the the drop in gold prices of the last two weeks.

Many people have been puzzled over the last few months by gold’s (GC2G -0.19%) behavior. It has tumbled since the start of September from around $1,900 an ounce to below $1,600. This has happened even while a financial crisis has erupted in Europe which, says traditional analysis, should be bullish for gold.

But there are a couple of other factors at play.

First: Gold hasn’t fallen as far as it looks. The gold price is typically quoted in U.S. dollars. Yet in the past four months the dollar has rallied.

At the start of September, when gold touched $1,900 an ounce, the dollar was $1.45 to the euro. Since then the euro has slumped to $1.30.

Net result? Gold, which traded at around 1,300 euros per ounce back then, has declined to 1,200 euros per ounce now.

The second factor: Sentiment.

Four months ago, sentiment was massively bullish on gold. It had just skyrocketed, in the wake of the U.S. debt ceiling debacle. According to data published by the Commodities and Futures Trading Commission, speculators and traders had taken nearly record speculative bets that it would rise further.

This usually precedes a backlash, and so it has been.

Today? Sentiment is pretty bearish. The CFTC says the number of speculative bets on higher gold have collapsed by more than a third. (via Will the Europeans have to sell their gold? – Portfolio Insights by Brett Arends – MarketWatch).

A bump on the road

The first 15 days of December, 2011, has seen weakness in gold prices – falling from roughly US$1900 to US$1600. The biggest drop, after ‘gold dropped 25 percent in the fall of 2008 — from over $1,000 an ounce to about $750’. Broad parameters of the situation were similar then – as now.

In 2008, the US economy was tanking, and gold was at psychological barrier of US$1000. This time around gold is at US$2000 psychological mark. And it is feared that the Euro-zone may collapse.

“The worst case scenario (a euro zone break-up) was pretty much ridiculous a year ago but it is now becoming more and more possible, to say the least,” Juan Valencia, credit analyst at Societe Generale, said.

This time around

So, what are the specifics now.

First are the European banks. It is reported

banks face about 320 billion euros in senior and government guaranteed debt redemptions next year. By comparison, they had issued just 12 billion euros of debt in the past six months.

With no solution to the euro zone debt crisis in sight, interbank market players say they are reducing credit lines to an ever increasing number of banks.

“It is utter madness … When we see big names paying 300 basis points over overnight rates for dollars you know something is wrong,” said the head of money markets at a bank in London, who asked not to be named.

“Credit lines have already been reduced, we are seeing the big names paying through the nose for cash from corporates as wholesale is pretty much dead. The focus now is for the core banks to raise cash through the retail/corporate space. Central banks may be called upon.”

French banks’ borrowing from the ECB topped 100 billion euros in the maintenance period ending November 8, compared to 87 billion euros the month before. French banks are more exposed than any those of any other euro zone country to Italian, Spanish and Greek debt, with holdings in excess of 600 billion euros, according to Bank for International Settlements data.

Of the contributors to daily Libor rates, French banks BNP Paribas, Credit Agricole and Societe Generale say they pay the most for three-month dollars, around 0.6 percent. But dollar rates have recently been on the rise for other core country banks as well.

In such an environment liquidity is at a premium. Some investors are even taking money out of banks and paying to keep it in short-term German or Dutch government paper, which is trading with negative yields.

Where has all that yellow stuff gone? Buried under a mound of silence?  |  Cartoonist - Dave Simonds on 18-6-2011 in guim.co.uk  |  Click for larger image.

Where has all that yellow stuff gone? Buried under a mound of silence? | Cartoonist – Dave Simonds on 18-6-2011 in guim.co.uk | Click for larger image.

Where is gold coming from

Negative yield brings us to another grey area.

Gold lending at negative rates. Europe has an organized market where gold owners can lend gold to borrowers – at rates varying between 0.5% to 2%. There are ominous whisper-reports.

The partnership between the Federal Reserve and European Central Bank to provide hundreds of billions of relatively low-cost dollars for euro-area banks should have relieved the pressure to come up with greenbacks. Yet gold market people say European commercial banks are being driven to lend gold for dollars at negative interest rates just to raise some extra cash for a few weeks. There’s not a lot of transparency about where the banks are getting the gold they are lending out, but it could be lent to them by either their national central banks or by gold exchange-traded funds.

There is also a third source of gold that is being lent in the market.  Gold that does not belong to any European Governments or to any ETF.

But obtained from deposed Middle East rulers of Egypt, Tunisia, and Libya.

Cash is king

Regardless of the source of gold, the cash situation at European banks remains a trigger for this gold sell-off.

The need for cash has overwhelmed gold’s traditional status as a safe haven in past few months, putting the metal on course for its first quarterly fall since end-September 2008 when the global credit crunch was at its worst.

“With access to liquidity being constrained, market participants have increasing problems to refinance,” Credit Suisse said in a research note. “As a result they have to sell their assets – including precious metals – to raise the much needed cash. This is the main reason why gold prices fall on days of increasing funding stress.”

This has obviously raised concerns in the Asian markets – the main buyers of gold. This extra supply of gold from European banks has led to a sell-off – led by Asian markets.

In recent weeks the gold price has fallen significantly from around $1900 to $1535 (intraday). Gold is now trading near Q3 target of $1650. The size of the move was far more significant compared to other recent unwinds, like those in May or August. One of the key factors for  long-term bullish view on gold is Asian demand – the majority of end-user demand for gold is from Asia. From an Asian valuation perspective, gold is also relatively cheap.

One way to proxy Asian demand for gold is to look at how gold performs during Asian trade. Over the past few years, gold has generally appreciated during Asian hours, reflecting strong demand for the metal. However, recent weeks have shown weakness in Asian hours. On previous occasions when gold traded poorly, such as in May and August, it remained relatively robust during Asian hours, with any sell-off tending to come in London and New York hours, suggesting that Asian investors were supporting an unwind of Western investors’ long gold positions.

This contrasts with the recent fall, noticeable across multiple time zones. In the very short term, we believe a reversal would need to be led by appreciation in Asia. Although a few data points do not constitute a trend, on Tuesday and Thursday gold rose by 2%, its largest moves higher during Asian hours since October 2008 and perhaps a signal that it could be turning back up.

Gold often trades like a risky asset. This has been evident in recent weeks where we have seen a strong positive correlation between gold and the S&P500, which we use as a proxy for risky assets. The rationale is that heavy losses in risky assets forces investors to unwind other positions to free up cash. As a liquid asset and also with heavily extended net long speculative positioning heading into this episode, gold has suffered.

The price-drop also generated sell-orders based on stop-loss triggers at US$1700. For the time being the stampede has abated. Asian markets were at the forefront of some investment demand.

Gold rebounded in thin trading during the Asian session Friday, paring some of this week’s losses with traders expecting gains to hold in the near-term with some dip buying likely amid a modest bounce in stock markets.  The yellow metal rose more than 1% in the session to a high of $1,589.90 a troy ounce after falling for four consecutive days this week.

A Hong Kong-based trader said there is some investment demand, which is driving up prices. Some speculators have also returned to the market after prices fell sharply this week.  Despite the slight improvement in sentiment, however, investors continued to be wary of the European sovereign debt crisis.

There is hardly any dissonance between various reports – which supports a belief that this may have a momentary technical correction before gold breaks the US$2000 per ounce barrier. In a year, where most asset classes have performed badly and market volatility took away whatever little was left on the table, fund managers may have locked in their profits on gold for the year. Remember, this is also the time of the year, when bonuses get calculated. The long-term fundamentals of the gold remain beyond argument.

Even in the short-term, this maybe a buying-opportunity one may regret having missed.


Currency in Takshashila

Posted in Gold Reserves, History, India, politics by Anuraag Sanghi on September 14, 2011
Guilds in Takshashila (Taxiles/a in Greek)- Extract from A History of Ancient and Early Medieval India: From the Stone Age to the 12th Century  By Upinder Singh (Pages 405-406). Source and courtesy - books.google.com. Click on the image to go to source.

Guilds in Takshashila (Taxiles/a in Greek) - Extract from A History of Ancient and Early Medieval India: From the Stone Age to the 12th Century By Upinder Singh (Pages 405-406). Source and courtesy - books.google.com. Click on the image to go to source.

Docile Indians …

Till August 15th, 1947, no king or ruler was able to impose any kind of currency monopoly by fiat in India. A unique aspect in economic history.

A by-product of भारत-तंत्र Bharat-tantra, India has the largest private reserves of gold in the world – totalling to nearly 20% of global gold holdings.

Absence of fiat currency was one of the cornerstones of भारत-तंत्र Bharat-tantra– the classical system of polity, by which India was governed. भारत-तंत्र Bharat-tantra worked on four freedoms – धर्म (dharma – justice), अर्थ (arth – wealth and means), काम (kaam – human desires) मोक्ष (moksha – liberty) and three rights – ज़र (jar – gold), जन (jan – human ties) and जमीन (jameen – property) for all.

This multiple-currency system passed into common parlance with idioms – like in Hindi, उसका सिक्का चलता है ‘uska sikka chalta hai’. Meaning ‘abc’s coinage is commonly accepted’. This idiom is now used to indicate a man of position, authority and standing in local community.

Thus coinage and currency, which play such an important technical role in historical research, becomes less than important in India.

Crossroads of the world

Takshashila, (Taxiles/a in Greek) at the cross-roads of the उत्तरपथ Uttarapath (known today as the Silk Route) and दक्षिणपथ Dakshinapath, was crucial to world economy. Takshashila’s system of guild-banking, hundis, deposits, currencies, corpus kept the world economy oiled and moving. Takshashila, close to the ancient cities of Mohenjodaro and Harappa, also possibly retained the knowledge of alloying, maybe even extracting, nickel – which ‘modern’ science achieved in 1751.

But that is yet another puzzle in history.

Turning points in 20th century history

Posted in Business, Current Affairs, European History, Gold Reserves, History, India, politics by Anuraag Sanghi on November 19, 2010
A poster advertising life of the "Abonos Nitrato de Chile" (Fertilizer Nitrate of Chile), 1930.

A poster advertising life of the "Abonos Nitrato de Chile" (Fertilizer Nitrate of Chile), 1930.

Gunpowder monopoly ends

Towards the end of 19th century, newly discovered nitrate deposits (sodium nitrate) in the Atacama desert of Chile came onto world markets. Chile’s nitrates were a crucial intermediate for gunpowder.

Chile’s nitrates broke the British monopoly over the trade in Indian saltpetre for the first time in modern history. French domestic production of saltpetre, barely enough for their own needs, could not challenge Indian saltpetre output that the British monopolized.

Indian saltpetre (potassium nitrate) could be simply refined and used directly in gunpowder – unlike Chilean nitrates. Also Chilean nitrates were limited natural deposits, whereas Indian saltpetre was produced on an industrial scale, accounting for some 70% of global production.

Germans quickly secured supplies of Chilean nitrates. A few years into the WWI, Germans brought the Haber-Bosch process from the laboratory stage to industrial production. The Haber-Bosch process for production of ammonia, gave Germans industrial capacity to produce gunpowder.

Causes for WW1

With this industrial capacity for gunpowder in place, Germany and Turkey, both non-colonial, industrialized powers challenged colonial powers, Britain and France, for access to world markets.

Diagram showing the world nitrogen quantities ...

Image via Wikipedia

The breakup of the Islamic Turkish Ottoman Empire was long seen (1890-1920) as an outcome essential for continued Anglo-French hegemony.

Funding WWI

Against Britain and France, the then dominant world powers, with extensive colonies, were Germany, the Austro-Hungarian Empire and the Ottoman Empire out of Turkey. Once WWI started, US funded both Britain and France. The US plied the Anglo-French alliance with extensive supplies and credit.

Emergence of USA

While millions died in European trenches, the USA bided its time. With mud, blood and disease taking a heavy toll, Britain, France, Germany, Turkey and Russia were soon exhausted and prostrate into a stalemate by the end of 1916. As the fate of WWI hung in balance, USA finally joined the Anglo-French side to gain a share of spoils.

 A soldier evacuated from the battlefront on a stretcher during WW1 - Image courtesy - bbc.co.uk. Click for larger image.

A soldier evacuated from the battlefront on a stretcher during WW1 - Image courtesy - bbc.co.uk. Click for larger image.

Financially unaffected, industrially strong, militarily effective, the US emerged on the world stage.

Post-WW1

Soon after WWI, as Anglo-French colonies and markets started opening up, US products gained new customers. Indians started buying Chevrolets, Buicks, Packards in small numbers. Victrolas started playing music in India – and on India. Michelin’s radial tyres from France became a byword in India for long-life. Indian natural rubber started going to Italy’s Pirelli and France’s Michelin.

Impoverishment of India

But Britain, a victorious nation was deep in debt – to USA and Colonial India. US emerged as the largest creditor nation. To settle these wartime debts, debtor Britain and creditor USA worked out a debt-repayment ‘mechanism’. Nothing but financial jugglery, this mechanism slashed the amount due to Colonial India and actually transferred the debt-burden of WW1 onto the backs of Indian peasant.

To settle this debt, Britain took recourse to gold from India. To give impetus to this transaction US supplied Britain with silver – then in abundant supply, in the form of US silver currency coins. This silver was ‘sold’ to Britain at double the market price – under the guise of the Pittman Act. Britain paid its wartime debt to India with this silver – at this inflated Pittman Act price. Abundant silver coins were stuck by the Colonial Raj, which are still available across India in large quantities.

To settle loans taken from USA to fight WW1, Britain extracted scarce gold from India. While payments for Indian exports were made in overpriced silver, the Indian peasant was forced to pay for imports and taxes in under-priced gold.

Starving Indian woman with swollen ankles & feet because she suffers from dropsy as young daughter stands by with swollen belly from hunger during famine crisis. (Photographer - Margaret Bourke-White; Date taken-1946; picture courtesy - life.com). Click for larger image.

Starving Indian woman with swollen ankles & feet because she suffers from dropsy as young daughter stands by with swollen belly from hunger during famine crisis. (Photographer - Margaret Bourke-White; Date taken-1946; picture courtesy - life.com). Click for larger image.

Due to this overpriced silver-under-priced gold combination, a surge in gold outflows started from India. Soon the US banking system was flush with liquidity.

Great Depression

Expecting the closed markets of Anglo-French colonies to open up, US economy expanded trade relations and industrial capacity. This expansion in trade and production of industrial goods was funded partly on the back of inflows of gold from India through Britain.

Finally though, protective barriers did not come down substantially enough – creating industrial over-capacity and excess liquidity in USA. Seeing ‘irresponsible’ bankers, waste ‘hard-earned’ gold on ill-planned trade expansion and production capacities, the US Federal Reserve clamped down on liquidity.

Great Depression followed. To ‘save’ gold-reserves, Roosevelt went further and nationalized gold.

Crime in the 20th century

In turn, Roosevelt’s gold nationalization, sparked a global crime tsunami. Only after the easing of restrictions on gold ownership by 1990, did the crime tsunami subside. The axis of this tsunami of crime was gold smuggling into India and narcotics trans-shipment through India.

A tsunami that engulfed all major economies of the world.

WW2

Unresolved issues of WW1 triggered WW2. Germany hemmed in from all sides by British client-states, unable to find markets for its industrial production,  reacted.

Germany, allied with Japan and Italy, proposed creation of larger ‘home’ markets. This was to be done by ‘expanding’ their own borders – to include neighboring countries. As first steps, on 3 October 1935 Italy invaded Abyssinia, now Ethiopia, Germany on 11-12 March, 1938, swallowed Austria; and Japan occupied Manchuria.

The basic assumptions of all the European powers, Japan and the USA were the same. The Confucian-Platonic ideal of superior, wise rulers who ruled over ‘inferior’ peoples.

These militant powers shared the same disregard for human life. Britain wreaked havoc by creating The Great Bengal Famine. Some 40-50 lakh (4-5 millions) Indians died. Hitler rained the Holocaust on the Jews. Some 50-60 lakh (5-6 million) Jews died.

Same difference.

Three faces of stagnation

Production capacity of non-OECD world was destroyed by years of colonialism, WW1 and WW2. Economic conditions after WW2 improved due to relative peace and as countries of the world started rebuilding their economies in the last 60 years (1950-2010).

The last 60 years has seen significant increase in industrial capacity of non-OECD nations. US extended supplier’s credit – using the US dollar, the favored currency of the Bretton Woods system.

A significant portion of economic expansion of OECD economies during 1950-1980 happened as production capacity of the world was rebuilt. The same capacities that were destroyed by colonialism, WW1 and WW2 – especially during 1850-1950 period.

WW3?

This creation of production capacity in non-OECD countries means economic stagnation and loss of political power for a few decades across OECD. With greater production capacity in the hands of non-OECD producers,  production capacity in OECD-USA must shrink.

Or a WW3 will be ‘needed’ to destroy the production systems of the poorest countries – to ‘save’ the West-OECD.

Creating false agenda's has become a full time job in the West with specialist think-tanks, media organisations and PR firms. (cartoon courtesy - http://polyp.org.uk). Click for larger image.

Creating false agenda's has become a full time job in the West with specialist think-tanks, media organisations and PR firms. (cartoon courtesy - http://polyp.org.uk). Click for larger image.

Red herrings

To get around this ‘problem’ of stagnation, the West has created artificial ‘crisis’ situations.

  1. Population Explosion
  2. Global Warming and climate change
  3. Civil Wars in Africa
  4. Islamic Demonization
  5. Terrorism
  6. Financial meltdowns

Complicating the current situation is the US currency mechanism, called USCAP (by 2ndlook) which favors selected US allies with advantageous exchange rates. China, Asian Tigers, Japan and NATO-Europe have gained significantly from the USCAP program.

The most notable loss due to trade distortion has been Africa’s.

Power Corrupts

During the 20th century, the world had to contend with an intolerable situation. The Anglo-Saxon Bloc (America, Australia, Britain and Canada) accounted for 80% of gold production (between 1200-1800 tons per annum) and controlled 80% of global gold reserves (around 100,000 tons circa  1920) also. Not even Chengez Khan had that kind of control over global economy.

Dawn of a new century

Things change.

At the beginning of 21st century, gold reserves in the hands of all the nation-States, are at a historic low. All the Governments in the world own less than 20%, i.e. 30,000 tons from global gold reserves of 150,000 tonnes.

Another 5 years of aggressive gold buying by global consumers will see this down to possibly 15%-17%. This will severely limit the ability of any State to wage a prolonged war.

A collapse of the currency systems in the world is imminent – in the next 5-15 years. Gold may give super-normal returns in the face of such an event.

Desert Twins - Westernization and Jihad. Problems both!

Desert Twins - Westernization and Jihad. Problems both!

Desert Bloc – beginning of the end?

The 20th century possibly saw the Desert Bloc reach its high-point. The world fully understands the bankruptcy of the Desert Bloc – and it may take some time for the effects of Desert Bloc propaganda to wear off.

Celebrations may, however, be premature. The alternate to Desert Bloc politics – भारत-तंत्र Bharat-tantra is yet to regain traction.

Indian Gunpowder – the Force Behind Empires

Posted in Business, European History, Gold Reserves, History, India, politics by Anuraag Sanghi on June 18, 2010
A vizcacha, relative of the chinchilla, in Chile's Atacama Desert. These herbivores are among few who thrive in the Atacama. (Photo shot on assignment for "The Driest Place on Earth," August 2003, National Geographic magazine) Photograph by Joel Sartore

A vizcacha, relative of the chinchilla, in Chile's Atacama Desert. These herbivores are among few who thrive in the Atacama. (Photo shot on assignment for "The Driest Place on Earth," August 2003, National Geographic magazine) Photograph by Joel Sartore

Arid, Desolate Atacama

On Chile’s northern border is the remote, arid Atacama desert. Desolate and dry, rain in Atacama happens once in 2-3 years. Some people living in the Atacama have never seen rainfall in all their lives. Yet, there is some sparse wildlife – a tribute to hardiness of living beings.

Strangely, the Atacama is home to a few ghost-towns – once boom towns. For five years, from 1879-1884, Bolivia and Peru fought with Chile over this rainless, arid and desolate terrain.

Behind this curious importance of the Atacama desert was nitrates. It was Atacama’s nitrates interestingly that broke an important British monopoly – based on India’s saltpetre production.

Untold secrets

In 1809-1810, the British had to mount a serious campaign in the Indian Ocean. The French, from their Indian Ocean naval bases at Île de France (Mauritius), Bourbon (Réunion) and Rodrigues, attacked East India Company ships carrying valuable saltpetre (also saltpeter, nitre, niter) – so essential for the Spanish War (1808-1809).

Indian saltpetre for could not reach Confederate armies due to Union naval blockade!

Indian saltpetre for could not reach Confederate armies due to Union naval blockade!

The British army, retreating across Spain, in harsh winter conditions, needed saltpetre. Under the onslaught of the French forces, ruthlessly pursued, the final escape of the British army, from Corunna was a miracle. The British General, John Moore’s death, at Corunna, Spain, was turned into a heroic ‘victory’. Charles Wolfe’s poem, The Burial of Sir John Moore after Corunna became essential reading for every English schoolboy.

In 1800, a son from a rich family of refugees from the French Revolution in America, after a survey of business opportunities in America, wrote

There already exist in the United States two or three mills which make very bad powder and which do however a very good business. They use saltpeter from India which is infinitely better than that which is produced in France but they refine it badly.

The son was Eleuthère Irénée du Pont, the family was the Du Pont family – and their firm is now known as EI du Pont de Nemours and Co. EU du Pont’s expertise in manufacturing saltpeter came from his training with the French Agency for Powder and Saltpeter (Regie royale des poudres et Salpetres) – and under the tutelage of Antoine Lavoisier, the French chemist, he boasted.

Behind the Dupont fortune was Indian saltpetre. Behind Lincoln’s success in the American Civil War was saltpetre. Behind Anglo-French confidence against Germany in WW1 was the control of the saltpetre deposits from India. Germans were able to sink many of these British saltpetre shipments. In turn, Germans with the Haber-Bosch process, in BASF factories, continued the war – without Indian saltpetre or Chilean nitrate supplies.

Saltpetre – what’s that?

What was saltpetre? Why was saltpetre important. Why did India play such an important role in saltpetre?

Unusually important, the chemical name of saltpetre is potassium nitrate – an essential ingredient in gunpowder. Indians had perfected the method of preparing potassium nitrate (KNO3). The other two ingredients in gunpowder being charcoal and sulphur – easily and freely available and cheap.

India’s military technology is history’s greatest ‘hidden’ secret. Official (and Western) portrayal of Indian military systems in the face of Islamic invaders, Mughal sultanate  and the rise of British imperialism makes out India as a sitting duck with ill-trained and terrified soldiers, armed with bows and arrows, who were hopelessly outclassed by the enemy.

Facts being otherwise, it raises questions about motives for this deliberate wrong portrayal.

The story from Mongolia

In the last 1000 years, there are sketchy records of gunpowder in India, with Rai Hamir Deva of  Ranathambore of the Malwa region, who supposedly used some Mongol deserters (1300 AD) to fight Khilji armies with gun powder. This may be misleading for two reasons.

Modern history credits China with the invention of gunpowder. Firstly, this is largely based on the work of a self-confessed Sinophile – Needham. With a dismissive one sentence, Needham opines, “On Gunpowder history in India, Oppert (1) was duly exploded by Hopkins(2).” And Indian history as the world’s largest producer of gunpowder was swept under the carpet. Needham conveniently ignores evidence like how

Jean Baptiste Tavernier recorded a local tradition in the 1660s that gunpowder and artillery were first invented in Assam from whence they spread to China and he mentioned that the Mughal general who conquered Assam brought back numerous old iron guns captured during the campaign.

Secondly, Mongol territories extended from Mongolia to the gates of Vienna and Russia – but not India. How is it that a few deserters-soldiers could establish the world’s largest gunpowder production system, so rapidly in non-Mongolian India. But, could not do so in conquered territories of China, Central Asia, Middle East, West Asia, and Europe.

A 100 years before Needham, India’s pioneering status in saltpetre was common knowledge. English publications, for instance in 1852 and another in 1860 gave weightage to the opinion of

those who believe that gunpowder was invented in India and brought by the Saracens from Africa to the Europeans; who improved its manufacture and made it available for warlike purposes.

Unlike China, with an odd textual reference or a drawing or a singular artefact, was the entire industry in India – which remained unrivalled in the history of the world. Compared to China’s paltry production of gunpowder, India’s widespread and organized gunpowder production system points towards indigenous development. There are reports, that in “664 an Indian visitor to China reportedly demonstrated the peculiar flamability of saltpeter and provided instructions on how to locate it (Pacey 1990, 16).”

Tall tales … thin stories

The deserter Mongol soldier source seems rather far-fetched considering that Mongol armies studiously avoided attacking India.  India, the richest economy of the world at that time, known and famous for its wealth, was spared by Genghis Khan! Just why would history’s foremost looter, invader, pillager spare India?

When Genghis Khan’s Mongol armies were running rampant, Islamic refugees found shelter in India, during the reign of Iltutmish. In 1221, Khwarezm-Shah and other Persian refugees, sought refuge in India, across the Indus into the Punjab, India, from Genghis Khan’s Mongol armies.

Encyclopedia Britannica says Fortunately, the Mongols were content to send raiding parties no further than the Salt Range (in the northern Punjab region), which Iltutmish wisely ignored …” (emphasis mine). As Indian military reputation waned under foreign Islamic rule, the Mongols mounted a military expedition. The Mongols could succeed in India only under the foreign rule of the much-derided Islamic Tughlaks.

Was Nalanda behind the gunpowder expertise in Bihar and Bengal region. A section of the Nalanda Mahavihara. The qualities of Buddhahood were personified in the vibrant style of art that was created in the university's intellectual atmosphere. (Picture by BENOY K. BEHL, courtesy: The Frontline). Click for larger image

Was Nalanda behind the gunpowder expertise in Bihar and Bengal region. A section of the Nalanda Mahavihara. The qualities of Buddhahood were personified in the vibrant style of art that was created in the university's intellectual atmosphere. (Picture by BENOY K. BEHL, courtesy: The Frontline). Click for larger image

India – the largest gunpowder source in the world

Now, combine saltpetre production with the fact that the heart of the Indian saltpetre production was in Bihar, which was also the home of the Nalanda seminary /university.

By the 16th-17th century,

In parts of India that never were frequented either by Mohammedans or Europeans, we have met with rockets, a weapon which the natives almost universally employ in war. The rocket consists of a tube of iron, about eight or ten inches long, and above an inch in diameter. It is filled in the same manner as an ordinary sky-rocket, and fastened towards the end of a piece of bamboo, scarcely as thick as an ordinary walking cane, and about five feet long, which is pointed with iron.

What about Europe

Saltpetre based gunpowder was in constant short-supply in Europe. Gold from the Americas, flowing into European trade channels, fuelled demand for gunpowder. Gunpowder became an essential ingredient for subjugation of natives, extraction of gold, capture of territories and slaves, piracy on the high seas – all the real reasons for ascent for European power.

The European gunpowder situation was grim. This can be gauged from “a letter of 1605 from the King of Spain to the Viceroy of Goa (the Portuguese trading settlement on the south-west coast of India) for example ordering the annual dispatch of 10 or 12 caskets of saltpetre.” Remember in 1605, Spain was the prime power European power. Compare that to the Indian situation.

When Raja Pratapaditya of Jessore capitulated to Islam Khan in 1609, he agreed to surrender twenty thousand infantry, five hundred war boats, and a thousand “maunds” (41 tons) of gunpowder.

Saltpetre from India kept the British 6-pounders busy at Waterloo!

Saltpetre from India kept the British 6-pounders busy at Waterloo!

The outcome of Waterloo can be gauged from a forgotten statistic – “In the year before the battle of Waterloo (1815) the East India Company exported 146000 cwt. of saltpetre to England.” 146,000 cwt is  7300 tons of saltpetre. British Ordnance Board powder mills in 1809,

produced 36,623¾ ninety pound barrels of powder and private contractors using government supplied saltpetre a further 24,433 ninety pound barrels. Some of British munitions output was supplied to allied governments: Portugal received in the years 1796-1801 … 10,000 barrels of powder, 500 tons of saltpetre; the British Government put into execution the gigantic plan of being a depot, the manufactory, the place of arms, and the centre of the European war

Spain and Sweden also received munitions for fighting on the British side against Napoleon. British victory at Waterloo, was in no small measurethanks to the use of Indian saltpetre, British gunpowder was widely recognised to be far superior to the charcoal-like French product.” British creditworthiness received a boost just before Waterloo. British debt, trading at 25% discount in 1813, was boosted by Indian gold, in 1813, procured by Britain.

Western historians now reluctantly admit, that without the “accumulated credits from Indian transfers since 1757, Britain’s financing of land warfare during the French wars could have been compromised.” Napoleon and France could not “march their combined armies to India, and strangle the supplies of British gold that had been financing successive coalitions against France.”

Without the advantage of Indian saltpetre, with a threatening Britain

in 1792 France was able to face danger on all sides, it was because Lavoisier, Fourcroy, Guyton de Morveau, Chaptal, Berthollet, etc., discovered new means of extracting saltpetre and manufacturing gunpowder.

Some 6000 factories manned by ‘salpetriers worked in France to overcome the naval blockade.

Meanwhile in India

Malwa’s rulers recruited  Purbias from Bengal and Bihar for their expertise in gunpowder. The British initially valued and later (after 1857) feared the Purbias for the same reason. The other reason was an established saltpetre production in the Malwa region till the 19th century. In Punjab, the main centres were Lahore, Hissar, Multan and Amritsar.

India’s gunpowder production system

India was the largest gunpowder production system – in the history of the world, till the 20th century. Specifically Bengal and Bihar regions. Operated by a caste of peoples called the nuniah, saltpetre beds supplied the most vital element in gunpowder – saltpetre. And India produced virtually all of it.

Especially, Bihar, Bengal, Agra and Tamil Nadu, Andhra and Karanataka regions (Anantapur, Coimbatore, Guntur, Kurnool). The Guntur Sircar also manufactured saltpetre on a commercial scale. A mid 17th century Royal Society paper documented how saltpetre was made in India. Most of the miniscule amounts of saltpetre produced in the rest of the world was calcium nitrate, a hygroscopic salt, which spoilt easily by absorbing moisture from air.

The Armenians, the ill-fated Omichund, a “notorious Calcutta merchant who was later to engineer the Plassey Revolution” played an important part in the Bengal/Bihar saltpetre trade. They were all significant players in the export of saltpetre (potassium nitrate). Also known as niter, saltpetre was a necessary ingredient for gunpowder.

Gunpowder becomes a British monopoly

After the annexation of Bengal,

“By seizing Bengal, the British exerted mastery over 70 percent of the world’s saltpeter production during the latter part of the eighteenth century. Since powder stocks could not be prepared quickly or easily, demand was no less during peaceful interims than during times of war, for, in addition to normal sales for peaceful purposes, gunpowder was steadily purchased or produced to build up military powder reserves for emergency use.

One reason why China developed fireworks, rockets, and other incendiaries rather than shot-firing artillery was China’s reliance on artificial saltpeter for making gunpowder. The Chinese also often used a higher proportion of charcoal and sulfur, which resulted in more fire and less ballistic strength. (16) India, on the other hand, produced saltpeter of very high quality, enabling the development of gunpowder weapons, in particular heavy siege guns, in addition to rockets. In many ways, Indian gunpowder making was more advanced than that of China, particularly regarding the strength of the final product, in its commercial organization, and in its application to military purposes.

As early as the 1460s, nearly forty years before the commencement of the East India trade, these Persian sources make it clear that the rulers of Jaunpur and Bengal already had organized saltpeter production as state monopolies managed by their chief merchants.

India was roughly a century ahead of Western Europe in terms of developing the infrastructure for gunpowder technology. It is significant, though, that gunpowder was not shipped to India from Europe in any significant quantities. By 1617, the Portuguese king had joined the general European clamor for more saltpeter. The capitalization of the saltpeter trade at Rajapur was in the hands of Saraswat Brahmins, with investors participating from as far away as Goa and Diu. Shivaji (r. 1664-1680) and his successors made nitrate procurement into a state monopoly, thus forcing the Portuguese, their Indian agents, and Banjara peddlers to deal with the Maratha state.

The Mughal Empire has been styled a “gunpowder empire,” which is a debatable characterization. (34) It is clear from Mughal records that guns were important, if only as symbols and occasional instruments of imperial power. The victory of Babur (r. 1526-1530) over Ibrahim Lodi (r. 1517-1526) often is attributed to his use of artillery, however, Babur himself valued his own judgment at least as much as his Turkish guns. (35) After the Battle of Panipat (1526), the first Mughal ruler ordered executions by firing squad, which are some of the first such killings recorded. Contemporary descriptions of Babur’s battles, however, emphasize the continuing dominance of cavalry, with guns present but not decisive. Nevertheless, warfare was changing in South Asia. Babur’s eldest son and successor, Humayun (r. 1530-1539/1555-1556), was keen to bring Rumi Khan, the Turkish artillery expert employed by the Sultan of Gujarat, over to his side. (36) The widespread use of firearms by Sher Shah (r. 1540-1545) during the brief Sur interregnum is significant, as is the fact that Sher Shah himself was killed by a gunpowder explosion. (37) The early sixteenth century, for India, was a time of significant military change, a watershed between the age of the blade and the age of the gun.

Sher Shah realized that a large army of peasant matchlockmen, recruited and paid by the state, could only exist in the context of a bureaucratic regime with enhanced revenue-collection capabilities and in a kingdom with strong commercial institutions. This lesson was not lost upon Akbar (r. 1556-1605), whose advisor, Abu al-Fazal, adopted many of Sher Shah’s innovations. The rising importance of the saltpeter trade, as well as its lowly origins, may be gauged by the meteoric rise of the warlord Hemu, who had opposed Akbar’s accession to the throne. Akbar’s biographer-courtier, Abu al-Fazl, uncharitably informs us that Hemu was a member of “the Dhusar tribe, which is the lowest class of hucksters in India. At the back lanes he sold saltpetre (nimak-i-shor) with a thousand mortifications … till at last he became a government huckster….” As Akbar’s army set out to challenge Hemu, their spirits were roused by a giant image of the saltpeter merchant-turned-general, filled with gunpowder and set on fire. (38) Ironically, Hemu was killed by the Mughals not with a musket shot, but in the old-fashioned style, with an arrow in the eye, followed by a sword blow to the neck.

Significantly, Sher Shah’s infantry, carrying firearms, were recruited from the eastern Ganges Plain, the same region in which saltpeter production had already become an important component of the regional economy. Later, this area provided infantry for the Mughals and eventually for the British, too. (from The Indian saltpeter trade, the military revolution and the rise of Britain as a global superpower. from: The Historian, Article date: September 22, 2009, Author: Frey, James W.)

After obtaining this vital monopoly, Britain protected this. Saltpetre exports were banned. Thus an ancient Indian technology was harnessed by the English to subjugate the Indian.

From gold came saltpetre, which made getting gold easier

Greater access of saltpetre to the British and with the shutting out of other European powers, saltpetre became essential for other European powers, because English had it. It became rare, as the English monopolised the trade.

In 1775, the French scientific publication, Observations sur la physique a proposal by Academie Royale des Sciences for increased saltpetre production within France.  Finally, a prize was announced in 1783. Nicolas Leblanc set up a factory at St.Denis, during 1791-194, near Paris for manufacture of saltpetre in France. The whole of France was mobilized for this saltpetre collection and gunpowder production.

Directions for gathering of saltpeter were printed and sent all over France. The prescribed recipe for saltpeter, charcoal, and sulphur was dispatched to the flour mills and the powder was ground according to simple specifications. Each district was directed to send two citizens to Paris for a month’s course in the casting of bronze and iron and in new methods for the manufacture of powder. (from From crossbow to H-bomb By Bernard Brodie, Fawn McKay Brodie.).

At the start of the American Civil War, against the Southern  Confederates, The North started with the benefit of a stockpile of some 3 million pounds of niter – i.e. saltpetre. The Confederates  sent James Mason and John Slidell to obtain saltpetre from Britain – and not empty diplomatic recognition from European powers. Mason and Slidell were captured by Unionist forces. Britain demanded release of Mason Slidell. Lincoln refused.

Queen Victoria issued a proclamation forbidding the export from all ports of the United Kingdom, of gunpowder, nitre, nitrate of soda, brimstone, lead, and fire-arms.—London Gazette, Dec. 4.

Britain imposed a ban on exports of saltpetre. Known in history as the Trent Affair, as Union saltpetre stocks went down, Lincoln backed down and agreed to release Mason and Slidell. Prices of saltpetre skyrocketed from some US$0.20  to US$3.0 within one year after the war began. The  Confederates established a Niter Corps to manage this shortage. British godowns overflowing with Indian and Egyptian cotton, did not really depend on Southern cotton, declared neutrality – and supplied both sides with Indian saltpetre.

Well understood by the US Government, C.H.Davis, of the Bureau Of Ordnance, Navy Department, on November 22, 1862 reported to the US Congress,

I feel it, therefore, to be my first duty to urge that suitable provision of ordnance material be made for probable future necessities of the Navy. Most important among them is nitre, which enters so largely into the composition of gunpowder that it may be said to be gunpowder itself, with some slight additions of sulphur and charcoal under proper combination.

It is not produced naturally in this country, nor by any other but India, except in insignificant quantities.

Hindostan alone supplies the whole world, which being a British dependency, places us entirely at the mercy or caprice of that power for our stock of this essential article.

India's widespread manufacture of saltpetre was private enterprise! Without state subsidy or support! (Picture by BENOY K. BEHL, courtesy: The Frontline). Click for larger image.

India's widespread manufacture of saltpetre was private enterprise! Without state subsidy or support! (Picture by BENOY K. BEHL, courtesy: The Frontline). Click for larger image.

End of the saltpetre era

With the arrival of Chile’s nitrate (sodium nitrate – NaNO3) deposits in Atacama desert, the world was weaned away from Indian saltpetre. Chilean nitrates were used to derive nitric acid, a key intermediate for explosives manufacture.

Chilean nitrate was sodium nitrate, (NaNO3), which could be used to derive nitric acid. Nitric acid was used for manufacture of explosives. HAPAG, the Hamburg based shipping line,  became the biggest in the world, carrying Chilean nitrates to Germany. The end of Boer War (1899-1902) saw the emergence of Germany as a major producer of munitions – especially the smokeless gunpowder. Even Britain started buying from Germany.

For a brief while, guano, a natural fertiliser composed of bird droppings, was also a source of nitrates for explosives. But, with the Haber-Bosch process, Germany could manufacture explosives – without the Chilean nitrate.

With the discovery of nitroglycerine and TNT and its widespread commercialization by Alfred Nobel (of Nobel Prize fame) from the 1860s onwards, this British saltpetre monopoly end. As the British monopoly over gunpowder started weakening, the British policy changed.

Pirate nation to super-power

Till 1856, sea piracy was legal.

The British crown gave permits for pirates to operate on high seas – through, what were known as, letters of marque. With the sanction of the English State, high seas piracy became a national pastime in Britain. Pirates like Sir John Hawkins made money on slave trade and piracy – targeting Spanish ships. Queen Elizabeth, apart from knighting him, also participated in these criminal enterprises. The Spanish Armada was assembled by Spain to end British piracy. Further on, British propaganda made these pirates and privateers into heroes – and the Spanish Armada into an instrument of Catholic repression.

Piracy was outlawed by The Declaration of Paris, in 1856, ratified by various powers. Initially by Austria, France, Great Britain, Prussia, Russia, Sardinia and Turkey – but not by Spain, Portugal and the USA. Soon after, Britain became a buyer of explosives, munitions. Challenges to British power started soon after this.

In less than than a 100 years after invention of alternates to Indian saltpetre, Britain was a shadow of its former imperial self.

The end of Indian saltpetre

To cover the cost of the Anglo-Indian War of 1857, the British Raj increased taxes on saltpetre. British traders from India started clamoring for a reduction in export duty from 1860 onwards. From more 20,000 tons of saltpetre exports in 62-62, it fell to around 11000 tons by 1865, and continued declining there after.

By which time, Britain was already the preeminent power in the world. On the back of Indian gunpowder factories.

Behind the Dupont chemical empire and  fortune was Indian saltpetre.
%d bloggers like this: