India Prefers Gold Over Paper, As Developed Economies Pile On Debt

Last Updated Nov 4, 2009 12:01 PM EST

The Reserve Bank of India (RBI), the country's central bank, announced it bought 200 metric tons of gold, worth $6.7 billion, from the International Monetary Fund (IMF). It's a good-sized purchase in the world of gold, but in wealth terms not that big a deal, even for a so-called emerging country such as India. It's more a comment on the finances of the so-called developed world, which are slipping steadily into excessive debt.

This purchase gives India about 800 tons of monetary gold, I believe. The U.S. government is far and away the largest owner, with 8,100 tons, and China is fifth-largest, with 1,100 tons.

An editorial in The Economic Times (New Delhi) called the purchase "no big deal," noting that every sensible central bank is diversifying away from the greenback, and these days, $7 billion is not that much money, even in India:

But with the US dollar showing distinct signs of weakness (not surprising, given its weak macroeconomic fundamentals) and set to weaken further, it makes eminent sense to shift from a dollar-centric reserve basket to a more diversified one, long-term....

Today, with reserves of $285 billion, and likely to grow as dollar inflows resume, the purchase, entailing a payout of little less than $7 billion, is too insignificant an amount for anyone to lose sleep over it, except for its symbolic value. And that symbolic value would be to further feed the gold frenzy that has Indians in a perpetual grip.

India is the largest consumer of gold, for jewelry and such, but there is also a monetary back story. In 1991, the Indian economy was in very bad shape; foreign currency reserves had run down to $1 billion, but India had a store of gold, which it pledged to the Bank of England for a loan to finance its imports.

Clearly they don't want that to happen again. And it's not likely to, if a fresh report from the IMF, unrelated to the gold sale, holds water. It warns that the developed economies, such as the U.S., will have doubled their government debt from 2000 to 2014, to an average of 120 percent of GDP:

Many advanced economies entered the crisis with relatively weak structural fiscal positions, and these have been further eroded not only by discretionary anticrisis measures, but also by underlying spending pressures...

Reflecting in part the weak initial structural position, debt dynamics are expected to be unfavorable in advanced countries, in the absence of a sharp discretionary correction.

Emerging countries, meanwhile, are projected to hold their debt steady at about 40 percent. This graph from the IMF report tells the story:

The last shall be first, and the first shall be last.

Precious Metals Trivia: How big is a ton of gold? A cube of about 15 inches.