Gold Is Our Saviour

It was just the other day that I commented on an editorial in the Economic Times which opined that the Reserve Bank of India’s purchase of 200 tonnes of gold from the IMF was “no big deal.” It was in this editorial that ET called gold a “barbarous metal.”

We are indeed fortunate that LewRockwell.com has published an excellent article today on the RBI’s gold purchase. The article, by Michael S Rozeff, a retired professor of finance, compliments the RBI for buying gold. Indeed, Rozeff goes further – he says that RBI will make profits from such transactions by which it replaces dollars with gold. I quote:

This transaction has a significant meaning that goes well beyond the dollar amounts involved, which are not that large. It means that a major central bank has actually disposed of dollar assets and prefers gold instead. It means that it regarded its dollar holdings as excessive. There are more central banks in the same position. They may do the same. China had been suggested again and again as the potential buyer of the 403 tonnes of gold to be offered by the IMF. India’s purchase was a surprise.

In financial terms, RBI is not simply adjusting its reserve position. It is arbitraging. It has a profit incentive to sell dollars and buy gold.

As I surfed through ET today, I found this Reuters story on central banks and gold, a report that suggests Asian central banks are “wary of rushing into gold.” Let them be as wary as they like, but our RBI has done well to buy gold. It should buy even more. The IMF is selling off another 400 tonnes of gold – and the RBI should bid for this too.

At the core of the matter is the status of the US dollar as the world’s reserve currency. This is now over. Rozeff puts it well:

There is no run on the dollar, but there is a steady movement away from dollars as a reserve asset in the coffers of central banks. A stroll on the dollar has become a brisk walk on the dollar, and there is a threat that this will become a trot on the dollar.

Oddly enough, it is our sedate RBI that is leading the charge. Rozeff says how RBI will profit from this move:

RBI and other central banks hold dollars whose nominal gold backing is about 15 percent of the FED’s monetary base liabilities (currency plus reserves). RBI sells $1,000 worth of U.S. securities and gets 1 oz. of gold. The $1,000 that it gives up have only $150 worth of gold behind them. RBI profits by $850…. this arbitrage is an economic incentive or force for selling of dollars and buying of gold. RBI has availed itself of this opportunity.

This, while ET calls it “no big deal.” Rozeff is quick to compliment the RBI for its decision, and he points out that the mistake made by central bankers in the past has been to support the US Fed, instead of competing with it:

Many foreign central banks have done the opposite. They sometimes have sold gold. They have usually accumulated dollars in substantial amounts in the form of dollar loans. They have not only not competed with the FED and taken advantage of this arbitrage opportunity, they have gone the other way and supported the FED and the U.S. government by their loans. This was one part of the financial side of government-run economic policies.

So, once again, ET bites the dust, and the Ganja Flag flies high.

And talking about “high” reminds me: Hey! Where’s my smoke? Hey! Joint Secretary, roll me a big joint, will you?