Gold rivals dollar as global currency

COMMODITIES UPDATE: GOLD

The first decade of the 21st century took the world economies back to the past: gold regained its glory as a major reserve currency in the international markets.

The dollar's slide, that began in early 2001, continued through the decade, making it a risky proposition for central bankers holding all their reserves in dollars.

With the Euro, the yen and the Chinese yuan still ill-prepared to fill the gap, gold is now increasingly favoured as an additional international reserve currency.

Unlike the 1990s, when central banks were actually selling gold in the belief that the yellow metal had little utility as a reserve currency, they have reversed their beliefs now.

Most central banks have resumed gold purchases over the decade, pushing gold demand through the roof. From levels of around $300-400 in the early part of this century, gold is now ruling around $853, partly reflecting the dollar's depreciation and partly the increasing demand for it.

Economists now argue that since gold - unlike the dollar - is no one else's liability and is not directly influenced by the economic, monetary and fiscal policies of any individual country, it stands a better chance of being accepted as a reserve currency by most nations.

However, this proposition may need revisiting if gold supply suddenly revives.

There is already massive evidence of this, with mining companies investing heavily in new leases and technology to extract gold from even deeper and more difficult tracts of land.

This year gold mining companies have been among the top performers on the bourses despite the lack of profitability.

India, always a gold hoarder par excellence, has been a major contributor to the rising prices of gold. Unlike 2000-05, when gold demand dipped slightly as prices ruled in the $300-500 range, the country saw gold imports zoom after the advent of capital account convertibility later in 2006.

Consumers who could not buy gold at $500 an ounce when the dollar was quoted at Rs 45, rushed to buy gold as the dollar fell consistently. At the current dollar-Rupa rate of Rs 30, demand is buoyant.

The stock market bull run and higher economic growth added to the lure of gold. India's annual consumption of gold has, thus, doubled from the earlier average of 500 tonnes.

The launch of trading in gold futures and options around 2003-04 gave a further fillip to India's interest in gold with retail investors dematerialising upto 50 per cent of their physical holdings of the metal.

However, the decisive impact came from the decision of most monetary authorities to reinstate the importance of gold in their official reserves.

Though the Washington agreement on gold did indeed get renewed in September 2004 with minor changes, it died an unsung death five years later when various central banks decided to keep their gold intact - and add to it if possible.

Current holdings of gold by the monetary authorities are estimated to be around 32,000 tonnes - very similar to what they held in the 1950s.

Despite some murmurs from economists about the inefficiencies involved in holding gold, most central bankers appear to have decided that prudence is the better part of valour.

Not surprisingly, average holdings of gold as part of official reserves, which were around 11-12 per cent earlier, have shot up to 18-20 per cent at current market prices.

The EU maintains about 25 per cent of holdings in gold while the USA's holdings have declined from around 60 per cent of reserves to about 40 per cent.

Geo-political tensions and the dollar's decline have sustained the demand for indestructible hard assets suc h as gold and platinum, not to speak of even silver and less precious metals.

Gold watchers say a price of $1,000 is not unthinkable, unless fresh supplies are spotted through fresh gold discoveries in the near future.

VIGNETTES 2015

Tourism tiger

Singapore, Malaysia, Hong Kong and Bangkok are developing cold feet these days. Their major source of revenue, tourism, is under serious threat from India.

With its positioning as God's own country, a line which the Indian Tourism Development Board borrowed from one of its states, the country is offering its eclectic mix of flora and fauna, and - needless to say - heritage all under one roof.

In 2002-03, the Indian tourism industry was the second-largest foreign exchange earner for the country. At present it's a leader by a far distance. The government's outlay on tourism in it's 13th five-year plan is Rs 7,500 crore, but that's not the reason for the tourist influx.

The main reason for the bulge in tourist arrivals from 2.2 million in 2002 to nearly 20 million by 2015 is the privatisation initiatives undertaken in 2005-10, when foreign companies and private investors were allowed to bid for tourism infrastructure development around all major historical sites and areas of natural beauty.

With tourist sites now upto world standards, foreign tourists are no longer worried about bed-bugs and diarrhoea when visiting India.

IPO from Charity

"Where does charity begin? It's high time corporates, which handle a significant portion of the money generated globally, answered this query in earnest," says Godwin Mercy, founder chairperson of Charity Unlimited, an NGO working among street children.

"The government should formulate laws on compulsory charity that would require corporates to allocate a portion of their earnings for rehabilitation activities the world over," she says.

"Creation of money alone won't ensure human prosperity; wealth should be shared. Even a minuscule portion of corporate earnings, if utilised prudently, could bring about fruitful changes in the fate of the millions who are deprived access to food, shelter, education and quality life. Besides, sharing will provide a new orientation and meaning to corporate activities," says Mercy, an MSW from Chicago University.

Talking about the Charity Unlimited IPO, which is slated to hit the market within a month, Mercy said the money raised through the issue would be utilised to set up a subsidiary. "The arm will help corporates streamline contributions effectively for rehabilitation activities," she says.

"Nature's law warrants a more equal distribution of resources to everyone. So those who create wealth have a responsibility to share it with fellow human beings who are deprived," she adds.