With the loss of faith in reserve currencies, the advocacy for gold is bound to gather momentum. It would be a monumental blunder if authorities in various countries dismiss the role of gold in the international monetary system with off- hand
S. S. TARAPORE
When the question of the role of gold as an international reserve currency is mooted, there are extreme reactions. The advocates of gold are called ” gold bugs”. On a personal note I have been an advocate of restoring gold to its pristine glory for the past twenty years and have been labeled as some sort of an atavistic crank.
Gold is considered as a barbaric relic, as Keynes called it, which should be banished from any serious discussion on the reform of the international monetary system. The anti- gold cabal of central banks, for decades, used their hoards of gold to ruthlessly depress the market price of gold. What has been the result? For years the key central banks and the IMF struggled to throttle gold demand by undertaking sales of gold. But with unbridled increase in printed money in these countries they have been unsuccessful in dampening the price of gold.
Gold prices move inversely to the major international currencies. The persistent rise in the gold price in the last three years reflects the loss of confidence in all major reserve currencies.
The proportion of gold in total reserves is as follows: United States ( 75 %), Germany ( 72 %), Italy ( 71 %), France ( 66 %), Netherlands ( 59 %) and Switzerland ( 18 %). In contrast, the proportion of gold is very low for some countries: India ( 9 %), Russia ( 8 %), Japan ( 3 % and China ( 2 %).
Most of the countries with large gold reserves have picked up their gold at US $ 35 per ounce and are sitting comfortably on a huge pile of gold reserves.
The above ground stocks of gold of the world are estimated at 165,000 tonnes, while about 38,000 tonnes remain underground which would suffice for say the next 10 years ( annual requirement of 4,000 tonnes) The Indian official stocks of gold are only 558 tonnes while private hoards in India are estimated to be between 15,000- 20,000 tonnes or about 11 % of above ground global stocks.
Bill Bonner, the financial columnist of the ” The Daily Reckoner” holds the view that gold price could rise above US $ 3,000 per ounce; in the current euphoria, observers think that the price could be as high as US $ 5,000 an ounce. It would be foolhardy to assume that the gold price would not fluctuate. A precipitous fall in the gold price would give buying opportunities.
Equally, if the present crisis deepens or there is a total catastrophe, of the international monetary system, Bill Bonner asserts that when all is lost gold will be the last man standing.
Gold as an International Reserve Asset It is time that the anti- gold lobby gives up its aversion to gold. Gold has a history of thousands of years as a medium of exchange and a store of value. In contrast, paper currency is just a few hundred years old. What is pertinent is that the track record of countries in handling fiat money has been extremely poor.
A number of States in the US are contemplating legislative reform to ensure that gold is made legal tender and Utah has already passed such a legislation.
The Royal Institute of International Affairs ( Chatham House, London) has set up a Task Force to Review the Role of Gold and Value of Gold in the International Monetary System with Nick Maxwell as the Programme Manager.
The Lehrman Institute has also undertaken detailed work on the role of gold in the international monetary system.
With the continuing loss of faith in reserve currencies the advocacy for gold is bound to gather momentum.
It would be a monumental blunder if the authorities in various countries dismiss the role of gold in the international monetary system with offhand laconicism. The path to restoration of gold in the international monetary system would not be easy. Advocates of go