The 'Goddess of Gold' Protects India

[Guest guest]

LONDON (November 16, 2004): It was July 1, 1991, the day of my

cousin's wedding. "You have to wear more gold, Sala. It's

auspicious," my mother said, as I was getting ready. As a teenager

growing up in India, I hated wearing traditional gold jewelry. It was

not fashionable enough. Only old people wore gold jewelry. I was

determined not to wear all that gold to the wedding. I would create

all the drama I could to avoid it.

 

On the same day, a different kind of drama was unfolding in the city

of Bombay, India's financial nucleus. Ironically, it would involve

gold, too. On July 1, 1991, the Reserve Bank of India (RBI) was in

sheer chaos. Foreign exchange reserves neared zero, and the country's

debt was spiraling out of control...

 

July 1, 1991, was the day India went bankrupt. It was the day the

emerging Asian superpower's external debt reached a record $69

billion - a third of its GDP. Thanks to the Gulf War and soaring

petroleum prices, India's imports were so exorbitant that the country

could not pay for them. How was it going to service its mounting

debt? With no foreign reserves and weak export income, how was the

Reserve Bank going to pay for India's costly imports?

 

Those were daunting questions that weighed on the minds of

economists, investors and individuals alike.

 

What weighed on my mind that day was just one thing: How could my

mother force me to wear ugly, ancient, gold jewelry? What will my

friends think of me? "It is so uncomfortable," I tried to

protest. "So what? Twenty years from now it will be worth so much

more, and you will be glad you have it. Besides, everyone at your

cousin's wedding will be seeing how much jewelry you're wearing, so

you better put on a couple more bangles." It seemed like I had no

defense. I panicked.

 

The Reserve Bank officials panicked, too; they could turn nowhere for

financial aid. They were blacklisted by Standard & Poor's, Moody's

and other credit rating agencies. Investor confidence in India was at

an all-time low. No international bank, no country, no institution,

no individual was willing to put a penny into the country. And why

should they?

 

The Indian rupee was worth nothing. In 1991, one rupee fetched 0.002

U.S. dollars. The rupee was a mere fraction of a cent.

 

To make things worse, there was intense political turmoil. The

government was unstable. Rajiv Gandhi, a former prime minister, had

just been assassinated. India's financial house was incapacitated.

There was no way out of this vicious cycle of debt.

 

No way out, except borrowing against the country's most important

asset - gold.

 

Back home, my mother's will to have me wear gold had prevailed. On

the way to the wedding she said, "Someday I hope you will appreciate

that we bought you gold." Embarrassed as I was, I went to my cousin's

wedding dressed in traditional gold - just like everyone else there.

 

On July 1, 1991, when India was facing sure bankruptcy, the RBI had

to pull an embarrassing move that saved the entire country from

certain doom and gloom. Then-Finance Minister Manmohan Singh pulled

the trigger and sold about $200 million worth of confiscated smuggled

gold (there was a thriving black market in gold to meet growing

demand).

 

The RBI shipped more of its reserves to the Bank of England as

collateral and obtained a $400 million loan to correct its balance of

payments and finance its debts. In other words, pledging the RBI's

gold was the only savior. It was also a huge embarrassment: A country

that worshipped gold as an auspicious item, now had to ship it away

to save itself.

 

The RBI used gold to save the country from spiraling debt. It used

its gold to keep the banks open and in business. It used its gold to

keep the economy running. And since 1991, India has gone on to

receive an investment grade rating by Moody's, and the stock market

is up nearly 400%. India now has a healthy trade surplus of $31

billion and owes the International Monetary Fund absolutely no money.

 

Gold is hugely important in India - both as an economic safety net

that saved it from falling deeply in debt in 1991, and as a personal

store of real wealth.

 

This tradition of gold has ancient roots. In 16th century India,

people stored their wealth in the form of gold and other precious

metals in order to keep it hidden from the taxman. Even today,

Indians hoard gold and worship it.

 

India's goddess of wealth is portrayed with gold coins falling from

her palms to symbolize prosperity. She is sometimes even referred to

as Swarnalakshmi, or the Goddess of Gold. Gold is considered so

auspicious, that no wedding is conducted without the exchange of

large quantities of gold.

 

Weddings aside, Indians hoard gold no matter what the economic

climate. They venerate the Goddess of Gold. And in today's easy-money

economy, they continue to amass gold - not only because it is

auspicious, but also as a consequence of two specific economic

environments.

 

First, the Indian stock market is relatively unsophisticated. The

total market cap of the BSE Index as of April 2004 was $226 billion.

The Dow Jones Total Market Index for the United States, on the other

hand, had a market cap of about $12 trillion. Trading volumes are

comparatively low, derivative trading is a relatively new concept and

the Indian stock market is not very accessible to the common man.

Investment vehicles are few and only available to the wealthy. Most

families, therefore, simply hold gold.

 

Second, for those in remote villages with no banks or safe-deposit

boxes, storing cash at home can be dangerous. Instead, they invest in

gold jewelry and wear it on their persons. Even the poor own at least

a small amount of gold.

 

It is estimated, as a result, that Indian families own anywhere

between 9,000 and 15,000 tons of gold. At today's dollar value, that

is about $115-192 billion worth of gold...approximately 10% of the

entire world's supply!

 

That is a huge safety net.

 

This country owns nearly $200 billion worth of an asset that is

appreciating in value and has just embarked on a phenomenal bull run.

 

Gold can be sold or pledged in times of financial need. In some

circumstances, it is the most liquid asset a family owns. It may be

easier to liquidate one's gold than to get a bank loan. Unlike many

popular financial assets, gold is not debt-backed. Gold is no one

else's liability. India's vast gold reserve is, therefore, an

insurance against financial failure.

 

Will this emerging superpower see the crisis of 1991 repeat itself?

It is highly unlikely. After all, the man who was finance minister in

1991 and opened up the Indian economy to global trade is now the

country's prime minister. India has regained its investors'

confidence and is a destination for foreign investment.

 

But should they ever face a financial crisis, the people of India

have a colossal hoard of gold to fall back upon.

 

The Goddess of Gold is smiling upon them.

 

Regards,

 

Sala Kannan

 

Source: The Daily Reckoning, London, England. "The Goddess of Gold"

by Sala Kannan

URL: http://www.howestreet.com/story.php?ArticleId=767