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The eternal gold rush

In India, gold has a unique position for Hindus as the sacredness of the metal goes back to the start of creation

Charan Singh 

Why gold will always remain the eternal and enduring investment
Nanda Menon
Portfolio Penguin
214 pages; Rs 499

"Gold is God, sir. Gold is God! Gold is God and you must never forget it!" That is how an Indian jewellery merchant explained the concept of gold to a European investment director. In the recorded history of the human race, gold is the only asset that has fulfilled the condition of safeguarding, protecting and transferring wealth inter-generationally. Gold is valuable, portable and its ownership can be kept confidential. Gold can also be easily transacted from the busiest commercial centre to the remotest hut in far-flung areas, a characteristic that no other instrument possesses.

This book, divided into two parts plus a fairly lengthy introduction, examines the intrinsic appeal that gold holds for people - security and the desire to own something of beauty - and investment strategies.

As Mr Menon, an investment banker, points out at the start, gold has been intimately associated with different cultures. In India, gold has a unique position for Hindus as the sacredness of the metal goes back to the start of creation. The Rig Veda describes all creation beginning with Hiranyagarbha, literally the Golden Egg or Golden Womb, from which Brahma, the creator, emerges. And India has been receiving gold for thousands of years by way of payment for trade, mainly of spices, from other countries. And even in the modern era, when less than half of Indian households have a bank account, nearly 90 per cent hold gold, such is the sway of gold for Indians.

Since gold cannot be created by alchemy, there is a finite amount of gold that can be extracted. It is this quality of scarcity and rarity that has helped gold remain the ultimate representation of money for nearly 12,000 years. A fiat currency is just an aberration from the norm, the author observes. And, again, "A paper currency in the hands of governments is like giving the keys of a distillery to an alcoholic - they are simply unable to say no."

In systematically analysing the demand for gold, the author points out that the explosion in demand is not restricted to China and India. It is spreading to countries like Vietnam, Thailand and Turkey. Illustratively, in Istanbul, the world's first ATM for dispensing gold is being established. In the context of the global supply of gold, the estimate is that only 1,77,200 tonnes of gold have been mined so far. This is not a large amount and can fit into a square room of 25 meters. Annually, about 2,770 tonnes of gold is physically produced, of which 60 per cent is used for jewellery, 20 per cent for investment and 20 per cent in industry, which includes the coffers of central banks and manufacturers of electronics, semi-conductors, and medical equipment.

The author explains in detail the various stages of the production cycle of gold and the risks involved in investing in mines and mining stocks, using as illustration the story of the Bre-X scandal of 1997, when it was found that the Canadian group had fraudulently overestimated gold resources in its Indonesian mines.

In the chapter on futures and options, the author suggests that the current unprecedented oscillation between backwardation (when the future price of a commodity is higher than the spot price) and contango (when the future price of a commodity is below the spot price) indicates a long-term bull market in gold. In chapter 10, after examining silver, platinum, and diamonds, the author concludes that there are no alternatives to gold that would provide comparable liquidity, reliability and ease of transaction as a repository of wealth. Therefore, in the absence of any alternative, demand for gold can be expected to increase even further, especially when income levels in many countries, including Africa, rise.

Gold was created when, over 4.5 billion years ago, meteors brought gold from a neutron star - the densest and smaller stars known in the universe - to earth, which was still raging red hot with volcanic activity. Because gold was dense and heavy, it descended deep within the molten mantle of the earth. It was later, some millions of years ago, when tectonic activity resulted in the formation of continents, that gold was ejected from the magma and came to the surface.

So the critical question is: how long will gold supplies last? Of the 510 million square km of the earth's surface, 361 square km is covered by oceans; these may have significant gold deposits but they cannot be extracted owing to technological and cost constraints. Of the remaining 149 million square km of land area, millennia of human habitation and exploitation have resulted in many areas largely being mined out, including in India. There are, however, still some unexplored belts in Latin America, West Africa and the Ring of Fire of the south Pacific. The other issue is whether there is a floor price for gold. Again, the author observes that the cost of mining is substantial and therefore $1,200 per oz. is perhaps the ideal floor price for gold.

The book is well-researched and cogently discussed. Mr Menon covers, with the ease and elan of an expert, issues ranging from the conceptual and mundane to explanations of the most sophisticated global markets. It is compulsory reading for any scholar studying monetary policy or for policymakers considering a shift back to the gold standard.

The reviewer is RBI chair professor of economics, IIM Bangalore

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First Published: Tue, February 02 2016. 21:15 IST