Gold is just money -- has al­ways been money -- and if I may add, will al­ways be money. Cur­ren­cies are just money sub­sti­tutes that de­rive their value be­cause of back­ing by money. In­deed, cur­ren­cies gained wide­spread ac­cep­tance not only be­cause of back­ing b


GOLD has been one of the most bor­ing as­sets to hold on to over the last four years. An over­whelm­ing ma­jor­ity of the in­vest­ment com­mu­nity per­ceives gold as a riskoff in­vest­ment. Self-ful­fill­ing price ac­tions have pos­si­bly re­in­forced that mis­per­cep­tion dur­ing times of crises. I don’t even look at gold as an in­vest­ment. Gold is just money -- has al­ways been money -- and if I may add, will al­ways be money. Cur­ren­cies are just money sub­sti­tutes that de­rive their value be­cause of back­ing by money. In­deed, cur­ren­cies gained wide­spread ac­cep­tance not only be­cause of back­ing by money but more im­por­tantly due to their fun­gi­bil­ity with money. Un­der the gold stan­dard, the US dol­lar was de­fined as 1/20th an ounce of gold and any­body could have taken a $20 note and ex­changed it for an ounce of gold within the US bank­ing sys­tem. In­ci­den­tally, an In­dian ru­pee was orig­i­nally de­fined as 11.3 grams of sil­ver. So for a bank or a gold­smith to is­sue a ru­pee note, he should first have 11.3 grams of sil­ver in their vault. This sys­tem of fun­gi­bil­ity of dol­lar gold was sus­pended in 1933 by Pres­i­dent Franklin Roo­sevelt, who went a step fur­ther to make own­er­ship of gold il­le­gal. Ever ma­jor dis­rup­tion in the world has been used to trans­fer power from the ci­ti­zens to the Govern­ment, as ci­ti­zens ever too will­ingly sur­ren­der their es­sen­tial lib­erty to pur­chase a lit­tle tem­po­rary safety. The “de­mon­eti­sa­tion” of cur­ren­cies thus hap­pened in mea­sured steps over a four-to-six-decade pe­riod. Th­ese tem­po­rary short-run steps have now es­tab­lished a truly de­praved long-run pol­icy. What this pa­per cur­rency sys­tem has al­lowed is a near in­fi­nite ex­pan­sion of the pow­ers of Govern­ment through in­fla­tion. As Amer­i­can nov­el­ist Ernest Hem­ing­way said, “The first panacea for a mis­man­aged na­tion is in­fla­tion of the cur­rency; the sec­ond is war. Both bring a tem­po­rary pros­per­ity; both bring a per­ma­nent ruin. But both are the refuge of po­lit­i­cal and eco­nomic op­por­tunists.” What we con­sider to­day as money (US dol­lar, In­dian ru­pee, euro etc.) are mere pieces of pa­per with noth­ing back­ing them other than the mis­placed con­fi­dence of gullible ci­ti­zens. A piece of pa­per printed by US Fed­eral Re­serve Chair­per­son Janet Yellen has pretty much the same in­trin­sic value as the one printed by Gideon Gono, for­mer Cen­tral Bank Gover­nor of Zim­babwe. In the long run, tulips have far greater in­trin­sic worth than un­backed cur­ren­cies. Read­ers might well be tempted to pon­der, “How in the hell did we reach this po­si­tion to­day?” For greater in­sights on the is­sue, I would rec­om­mend one of the best books writ­ten on this topic, What Has Govern­ment Done to Our Money by Mur­ray Roth­bard.

Go­ing by the price ac­tion of the last six years, read­ers might be tempted into be­liev­ing that the de­mand for gold is less than the sup­ply. Noth­ing could be far­ther from the truth. An­nual de­mand has been run­ning far ahead of gold mine sup­plies, and prices have been con­tained through a de­lib­er­ate price sup­pres­sion mech­a­nism or­ches­trated by the Bank for In­ter­na­tional Set­tle­ments (BIS) through the US Fed­eral Re­serve and the Bank of Eng­land (BoE). Through a se­ries of pa­pers ti­tled “Do The Western Cen­tral Banks Have Any Gold Left?”, Eric Sprott of Sprott Inc, a global pre­cious met­als in­vestor, has shown that an­nual net con­sumer de­mand has been run­ning for the last decade or so at about 4,000 tonnes/an­num, whereas the new mines sup­ply has av­er­aged about 2,800 tonnes.

How prices have been con­tained un­der such con­di­tions of de­mand­sup­ply mis­match is a rather tech­ni­cal is­sue that will need a sep­a­rate ar­ti­cle by it­self. Just to pro­vide a one-line sum­mary, it’s done in the fu­tures mar­ket by hold­ing con­cen­trated short po­si­tions by non-ver­i­fi­able par­tic­i­pants. The cen­tral banks side-stepped the is­sue by show­ing owned and leased hold­ings of gold as one line item.

So, as hap­pened dur­ing Raghu­ram Ra­jan’s ten­ure, the Re­serve Bank of In­dia (RBI) swapped/leased a good por­tion of its 557-tonne gold re­serves with the BoE. The BoE, in turn, would lease this gold to one of the par­tic­i­pat­ing banks, which would then sell it on the open mar­ket. The gold would then re­flect as be­ing owned by both the pur­chas­ing in­di­vid­ual as well as the RBI. This dou­ble count­ing of gold could well be to the tune of around 20,000 tonnes (around 15 per cent of to­tal sup­plies above ground), and the chances that the RBI gets this leased gold back are very slim. Why so? It took Ger­many more than four years and that too with im­mense po­lit­i­cal pres­sure to get the 300 tonnes of gold that it had kept for safe­keep­ing in a New York vault dur­ing the days of the Cold War. The repa­tri­a­tion re­quest that Ger­many raised in 2013 was com­pleted only a few weeks ago.

If gold were in­deed as plen­ti­ful, why did it take four years for send­ing just 300 tonnes? That too, this was given to the US Fed for safe­keep­ing, to be made avail­able on de­mand by Ger­many, and not to be leased into the mar­ket. My guess is that when the time comes for our gold repa­tri­a­tion, we will get worth­less printed dol­lars or pounds in­stead of the gold.

Would Ra­jan have been aware of the en­tire gold price sup­press­ing mech­a­nism when he leased the RBI gold to the BoE? As some­body who later be­came the vice chair­man of the BIS in 2015, I would sus­pect that he would be well aware of the ex­tent of de­mand­sup­ply mis­matches and more im­por­tantly, about the role of gold it­self. Of course, he sugar-coated the gold leas­ing episode by say­ing that we will get gold of greater pu­rity when we need it back. Our gullible me­dia swal­lowed this and even praised him for it. With­out a sec­ond line in the RBI to ques­tion his ac­tions and with Fi­nance Min­is­ter in P. Chi­dambaram who did not know the dif­fer­ence between gold and cop­per or glass, he had a free hand to do what he wanted. I can’t re­ally prove that Ra­jan was aware of all the above.

Ra­jan might well do what he does, but in ei­ther sce­nario, what we see is not what we get. If the US Fed and the BoE have been ma­nip­u­lat­ing gold prices for a long time, why can’t they do it for­ever?

A more im­por­tant ques­tion would be if the raison d’etre of cen­tral banks is to main­tain their monopoly over is­su­ing cur­ren­cies, why would they ever al­low gold to re­gain its mone­tary sta­tus?

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