India's shrewd gold move leaves dollar out in the cold
November 8, 2009
 By William Pesek
Gold? That relic of the past that doesn't pay interest or dividends and can't be eaten? A fool's game best left to the dinosaurs out there.
India is going its own way with a $6.7 billion (R51bn) gold buy from the International Monetary Fund (IMF). The deal turned heads in markets. It should do the same in capitals from Beijing to Washington.
India's 200 ton deal wasn't huge considering how much gold central banks hold. But it's the symbolism that matters.
As markets brace for central banks more aggressively diversifying reserves away from US assets, here are four things we can conclude from India's gold rush.
One, the dollar's plight just got worse. Mounting US debt is bumping up against a dismal employment picture, a toxic mix that may get the attention of credit-rating companies. This US recovery looks to be a jobless one, complicating things for a president grappling with two unpopular wars.
That raises the spectre of even more stimulus spending, more bond issuance and more pressure on central banks to avoid a dollar crash. It is well-known that Geithner is relying on Asia to continue loading up on treasuries.
Yes, talk of the dollar's death is overdone. There is still no obvious replacement. But Asia's tolerance with falling US assets is evaporating. India's gold grab is the latest reminder of that.
Two, India's got game. China doesn't talk much about its currency reserves, yet you have to imagine a few top officials in Beijing are red-faced this week. China seemed the overwhelming favourite to get the first chunk of the gold the IMF is off-loading to shore up its finances.
While India's people are major gold hoarders, the government hasn't been. India really did display the savvy of a hedge fund here. It got what it wanted, surprised markets and will sit back and reap the benefits as gold rallies.
Traders are now betting on who will announce the next big purchase. Will it be China looking to employ its $2.3 trillion of reserves? What about Japan, which has the second-biggest pile of currency? Or Gulf states working to end dollar hegemony?
Three, the IMF is back. The crisis of the last two years put the Washington lending institution back in business. Now it's flush with fresh liquidity to help the nations that need it most.
Investors had been on edge after the IMF approved the sale of 403.3 tons of gold in September. The concern was that a fire-sale might spook markets. Instead, the IMF's first such sale in nine years managed to soothe them.
Last Monday, Anoop Singh, the IMF's Asia-Pacific region head, said that the lender was redoubling its efforts to help developing nations reduce imbalances and retool economies. A day later, the gold sale was disclosed. Expect a busy and proactive 2010 at the IMF.
Four, central banks are reverting to the past. Almost 100 years ago, John Maynard Keynes chided India for its "ruinous" love of the "barbaric relic". Perhaps central banks were reading their Keynes over the past two decades, during which anti-gold sentiment pervaded.
The belief that inflation had been defeated made paper currency seem a safe and more practical bet than bars of gold collecting dust. The dollar's swoon is prompting a history lesson, putting gold back in vogue. It says much about where the global financial system finds itself.
This gold revival has a clear geographic profile, too. Expect Asian central banks, which took the whole "trust-the-Federal-Reserve-to-protect-the-dollar" hype too literally, to be especially avid buyers.
If you are looking for the next big industry in Asia, it may just be manufacturing fortified warehouses. Many nations will need Fort Knoxes to store all that bullion as the dollar's reign falters. - Bloomberg
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