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Pointing the gold finger

Our gold reserves are still way below levels central bankers in the West are comfortable with.

india Updated: Nov 03, 2009 22:07 IST

India bought itself some glitter this Diwali. The symbolism in the purchase by the Reserve Bank of India (RBI) of 200 tonnes of gold from the International Monetary Fund (IMF) is inescapable in a land that venerates the metal and for a nation that had to pawn its bullion two decades ago. The cheer spreads when the deal forms part of India’s commitment to shore up the IMF’s finances so that it can offer soft loans to poor countries trying to extricate themselves from the financial crisis. And it also makes for prudent banking. Bullion had slid to under 4 per cent of India’s foreign reserves as a tide of dollars sought out the most promising emerging markets. The central bank’s first significant attempt at rebuilding its gold reserves since the 1990s will raise the share of a tested hedge against inflation and currency movements to 6 per cent of its foreign reserves.

Our gold reserves are still way below levels central bankers in the West are comfortable with. The US Federal Reserve holds nearly 80 per cent of its foreign reserves in bullion. The European Central Bank holds around a fifth. The French, Germans, Italians and the Dutch, however, retain well in excess of half their reserves as gold. China, which was widely expected to be the first to buy some of the 400 tonnes of gold the IMF is selling this year, has increased its holding by 76 per cent in the last six years. Efforts to keep the world economy afloat will, the IMF estimates, see public debt swelling by a third in the 20 biggest economies. This will exert unprecedented pressures on prices and exchange rates. It is a good time to get into gold.

Even if it means buying the stuff at record prices. The $1,045 an ounce the RBI paid for its October acquisition is just shy of gold’s lifetime high in the open market. When an inert buyer stirs, two conclusions are unavoidable. One, gold has been gaining on its own, not merely because the dollar is weakening. And two, by locking $6.7 billion into bullion, the RBI expects the dollar tide will not ebb. Gold in the vault puts money a little further out of circulation because it is slightly more cumbersome to liquidate than, say, the euro. Buying gold, thus, makes more sense than hunting around for an alternative to the badly bruised dollar.