Gold: Indian Women Teach Modern Economists

Published: 14th November 2015 03:29 AM

Gold: Indian Women Teach Modern Economists

Last Updated: 14th November 2015 03:38 AM

Modern economics had consistently dismissed gold as archaic and saw in waste paper more economic value than in gold. Over the last 50 years, it looked as if they had subdued the powerful gold through Dollars, stocks and other modern financial assets. But, to their shock, gold now seems to be bouncing back to relevance with the rise of phoney financial assets in the global economy. The yellow metal seems to possess some mystic hidden power. To know its mysterious value calls for a brief look at its economic history.

US outlaws gold

In the late 19th-early 20th centuries, the yellow metal was derided as a “barbaric relic” by noted thinkers like inventor-businessman Thomas Alva Edison in the United States — a view later endorsed by economists like Maynard Keynes. The powerful anti-gold campaign coupled with the Great Depression of the 1930s forced, and also justified, the US to outlaw the evil gold as a private asset and nationalise it in 1934. The US government acquired all private gold and more than trebled its gold official reserves in 12 years — from 6,500 tons in 1930 to almost 20,000 tons by 1942. This is something unthinkable in India where gold is considered godly.

In 1950, when the International Monetary Fund was born, its member world nations accepted the US Dollar as global currency on the US promise to give gold in exchange for US Dollars at one troy ounce gold for $35. Thus, as possessing the US Dollar was equal to possessing gold, the US Dollar acquired the power of gold and stature of global currency. Result: US became global financial power. With the dollar fixed to gold, exchange rates of all world currencies were fixed to the Dollar from 1950 to 1972. In this period the US led a valiant attempt to wean the world away from gold by maintaining the gold price at $35 per ounce. To contain the price at $35 per ounce, the London Gold Pool formed by eight major European countries, agreed to sell their gold, if the unofficial market price of gold rose above $35 per ounce, to bring the prices down to $35 or less. The scheme proved disastrous as the Pool and the US lost almost two-thirds of their gold reserves. The US gold reserves nosedived from almost 22,000 tons in 1950 to 8,000 tons in 1971 to meet the demand for gold in return for dollars. A panicked US suspended gold-dollar convertibility and soon legalised private gold. That was when the fixed exchange regime fell flat and floating exchange rates emerged. Gold won the first round against economists.

Gold bounces back

But, by that time, some two-thirds of the gold-plated US Dollars had come to be owned and held outside by those who thought the US Dollar was as good as gold. To ensure these nations continued to hold their dollar reserves, the US strategically got Saudi Arabia and later other oil producing nations to demand the Dollar for selling oil so that all oil buyers needed to hold Dollars to pay for the ever rising oil prices. This was known as the Petrodollar. In the 1970s and the 1980s the Petrodollars strategy kept up the world’s demand for US Dollars. And with the onset of globalisation in the 1990s, the Dollar became supreme till the 2008 financial meltdown sounded the alarm. The world nations now hold reserves of $7.3 trillion in US Dollars. To make it worse, from being the net investor in 1970s the US has become the net debtor now with its global debt now topping 130 per cent of its GDP. With global debt designated in US Dollars at $49.1 trillion now — up from $31.4 trillion before the 2008 crisis, the world is sinking in Dollar-designated debts.

The Bank of International Settlements (BIS), owned by the central banks of the world, which “serves as a bank for central banks” says in its report (Oct 5, 2015) that extreme levels of global debts threaten the world financial system. More importantly, it shocks modern economists by saying that the very “gold” that was dismissed as a barbaric relic and its cousin metal “silver”, offer protection against crises in the financial system. The barbaric relic seems to be emerging as the post-modern global economic asset and safety net. The unedited truth is that gold is no more a barbaric relic.

Indian women & gold

Now, come to India. The Economist magazine (Nov 20, 2013) wrote, “In Hinduism, Gold is sacred almost on par with Gods.” The deep nexus between Hindus and gold is only half the truth. “Today, whether Hindu, Christian, Buddhist, or Muslim, bedecking the bride in gold invests her with good fortune,” says anthropologist Nilika Mehrotra. Indian women, of any faith, educated or not, love gold. A study of investment preferences of women academicians teaching finance in Coimbatore and the surrounding areas in Tamil Nadu showed that gold was their third preferred investment option and stocks last. A study among working women in Ahmedabad, four-fifths of them graduates or post graduates, showed that gold was their second investment choice. Love of gold is an Indian reality. But the Indian government followed the US way of gold as evil in India. What a mismatch. A half-hearted gold control in the 1960s attempted to introduce18-carat gold, which made Rajaji call it “18-carat government”. When the Western ‘hate gold’ paradigm operated in India from 1948 to 1992, smugglers like Haji Mastan and Dawood Ibrahim supplied gold to Indians.

The Indian economic establishment’s relation with gold in the past could be seen in two phases. First the unrealistic, idealistic and hostile phase (1948-1992), which saw gold as ostentatious. It was also unrealistic because it missed out that even the poorest Indian household — irrespective of religion or region — would love to possess a few grams of the yellow metal. Next the realistic, friendly, but ambivalent phase (1992-2015). The ambivalence toward gold has ended now with the Modi government internalising the micro gold economy into the macro gold economy of India.

Three Gold Schemes

The three gold schemes launched by Prime Minister Narendra Modi represents the government’s acceptance of gold as a reality of the Indian economy. One, banks will accept Gold Deposits from the public; two, it will sell Sovereign Gold Bonds to people who want to buy gold in future; and three, the government will sell Indian Gold Coins to the people. In the Gold Deposit scheme, any one who has gold at home can deposit the gold with banks and earn interest at 2.5 per cent on the gold, which otherwise would be lying idle without any return. On maturity the depositor will get the cash equivalent of the gold at that time. The next is the Sovereign Gold Bond scheme. Here anyone who wants to buy and stock gold for a marriage in the family years away or generally wants to invest in gold, need not buy and stock the yellow metal. The bonds will carry an interest of 2.75 per cent. The third scheme is sale of sovereign gold coins by government to the people. For how these schemes operate at the people’s level and how they will support the macro economy of India, await the next part.

QED: The BIS view of gold as a protection against crisis in the financial system and the Modi government’s new policy on gold endorse the Indian women’s judgement and choice of gold as a more reliable investment than modern financial assets. While in the past five years, the Rupee has depreciated by 47 per cent against the Dollar, gold has appreciated by 28 per cent against the Rupee. Indian women seem to have taught modern economists a couple of lessons on gold.

The author is a well-known commentator on political and economic issues


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