Oh My Gold!

Gold might have been formed from a supernova nucleosynthesis process like many other metals, yet it is very unique from the rest. Gold has always been a symbol of prosperity, wealth, goodness and trust.  Gold has been a part of our life all through the ages. The first of all "Ages of Man" is termed as Golden Age. In mathematics and arts, we have Golden Ratio. Midas touch is often referred to as Golden Touch. The list is endless.

I know what it caused, if you are interested. Few years ago when I was in Hong Kong representing India as one of the panellist for Gold and Precious Metals Investment World Conference, one of the participant from the audience asked me why do we Indians love to own gold despite the fact that it is an non-interest bearing asset. My answer was simple - "Indians know something that the world doesn't know about gold".

Estimates vary, but the consensus is that Indian public holds more than 25,000 tonnes of gold in their households. At current price of $1750 an ounce, the wealth held by us is a staggering $1.407 trillion. This is of course excluding Reserve Bank of India holdings of 557.70 metric tonnes and other inventories held by trust and worship places. The world's richest temple - Sree Padmanabhaswamy temple - located in south of vindhyas in southern part of India has gold and treasure worth $26.76 billion. If one would take antique value into account, these assets could be worth more than ten times of current value. The Tirumala Venkateswara Temple, one of the wealthiest temples in India has some $7.14 billion in gold, coins and other assets. So, why do we Indians stack up gold as if there is no tomorrow? What is the secret...?

Do we actually know the secret that others don’t know? I would say so. The value of gold is a thing that this world conveniently failed to understand; which we Indians know better than anyone in this planet. Being a culturally strong value based system; it is quite natural that we understand value better than anyone. Evident from the holdings that we have; yet we always prefer to go for gold. Merriam Webster defines value as "something (as a principle or quality) intrinsically valuable or desirable". This value is intangible which requires a sixth sense to gauge it. Is that a too complex an algorithm to crack? I don't think so. When people in the west (read U.S) levitated "Apple", the maker of iPhone to the most priced company of the world, they should be seeing value in gold. This question is best left for my cousins of the western world to find an answer.

The U.S is still reported to possess the largest official gold reserves (underline the word official) at 8,133.50 tonnes. However, all of you know by now that “officially reported” statistics in U.S is just a mockery of the truth. To this day, I am highly skeptical of the US reported reserves as these reserves have neither been independently audited nor independently tested for good delivery bar status since 1950. Now, travel across the Atlantic, central banks across Europe continued to sell their official gold reserve as part of Central Bank Gold Agreement as they viewed it as non-interest bearing asset; while at the other end of this planet, the Asian and Eastern central banks continued their purchases.

In one of my 2006 research reports, when I discussed how gold would be trading in a four-digit number when the BRIC countries start hiking their gold reserves, very few actually visualized what lies ahead. China has been secretly stacking up gold for many years and announced its purchase during April 2009. In October 2009, Reserve Bank of India has done the single largest purchase in the last 32 years by picking up 200 tonnes of gold from the IMF at an average price of $1045 an ounce - at a level where many investors then were not comfortable to own this piece of metal - thereby signalling to the western world something that they never understood till today. And to be honest, the western economies were flummoxed by the Asian central banker’s action. And, if one thinks, Asians stopped staking up any gold post their 2009 announcements, think again.

What is this signifies?  Shifting of centre of gravity to Asia? The answer is a clear Yes. The current mess that these western economies face is largely because they failed to understand what gold could do to them and to their economies. The seeds of this mess were sown way back in August 15, 1971 by then U.S President Nixon by abandoning the gold standard. For a billion Indians for whom gold is something special, I would say this day was a true independence day as the so-called superpower in the west failed to visualize what lies ahead for them.

The memories of 1991 are still fresh amongst us, when the Indian government airlifted gold to pledge for an IMF loan during the balance of payment crisis. The Indian rupee remained largely unscathed and never experienced the extreme depreciation during the 1997 East Asian currency crisis. Why? Gold again; implicitly explained. The relationship between Indians - and in general Asians - and gold are closely intervened that it becomes so complex for others to understand this equilibrium.

Savvy investors are already parking their money into gold; and one question, once unthinkable, is increasingly being asked by investors: where would gold go if a new gold standard is to be adopted to support these fiat currencies, more pressingly USD?  The answer is simply if one assumes that only currency in circulation needs to be backed directly and completely by gold. And, if one uses the U.S Monetary base with the official holding of 8,133.50 tons, then the price of gold is derived to be $10,700 an ounce.

The value of gold will always remain the same and it is currency in which it is denominated fluctuates. It will always maintain its purchasing power; it is a true insurance and if you are alive the next day, you shouldn’t be questioning your insurance. The western world has to decide whether they wanted to play the game of price or value. Whether, they wanted to be a dangerous speculator or a happy investor. The answer lies in the difference between price and value. My business smart western cousins always played the game of price well ahead of others; and in the process failed to identify the real value. This gold reserve race is now becoming the new nuclear arms race. After all, "he who owns the gold, rules the world..." 

Gold is omnipresent. It has always been associated with mankind from time immortal; and is indeed the real wealth (money). As long as the man kind understood this, this planet was the best place to live in, but when this association got diluted as it stands today, we are not only searching for a new global order, but looking to find a single solution for multiple problems.

To me, gold is the Bellerophon, killing Chimeras of the world.

Belling the Cat !

They did it when others are reluctant to do. When the whole planet knows that United States should not deserve the rating what it had till yesterday and that the value of USD is far lower than anyone can perceive rationally. But, it was S&P to announce to the world that the US is in a far more trouble than anyone can ever imagine!

The downgrade should have come many years ago; nonetheless they at least did it. The reality check came in for these rating agencies during the Lehman days, where ratings then were a joke. The entire world knows the rating status of Lehman before their bankruptcy. And, quite understandably it now seems that some of these rating agencies have learnt their lessons.

But, it still seems that western politicians have not learnt their lessons. We had seen in it during the Roman Era, The Great Britain days and now the United States. It is no expectation. It has to be accepted. Inevitably, we are humans and prone to make the same mistakes time and again. These mistakes were made centuries back in an era that we never lived in, and these mistakes will again be made in the centuries to come. There can be no single country that will ever dominate this planet. There can be no single fiat currency that can be a reserve currency forever. It is a wave phenomenon. It is THE Nature’s Law under which the entire universe revolves around. We will see this phenomenon quite often in finance – markets and economies - purely because; crowd psychology prompts one to make the same mistake.

Although, it is premature to search for the new world order – the next super power, the next reverse currency, the urge for the new world order has already began and it is just a matter of time (read years) before the new one arrives, just like the new wave brings cheer and hope.

Uncle Sam has been robbing peter to pay paul. Truly, America is a poor man’s land earning their livelihood on somebody else’s money. In a truly globalised village, none is isolated; the entire planet is feeling the pain. And, the global economic unrest on the US is on the rise. And, we are nearing the day when peter would stop paying paul; and that day would be remembered for centuries until the next new wave creeps in. Purely because, no one can take that pain.

The problems surfaced in the US are only a tip of the iceberg and what S&P could do is to alarm the world to take their wallets back, so that the pain will be less severe, at least to peter.

Kudos to S&P for belling the cat, finally!