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ShareGold speculators have been predicting the collapse of the US dollar. They say the only option the world has to have a hedge against this uncertainty is gold. It is this argument they have been using to prop up the value of gold.
But wishing away the dollar will not be that easy. Nor is the dollar as vulnerable as many imagine.
We carried out a simple number crunching exercise to find out where the US would stand when compared with all the BRIC countries. What we found was startling (see table).
We found that the US has more gold than all the BRIC countries put together.
Then we took the value of gold which has been fluctuating. As a measure of respect to speculators, we have assumed the value of gold at $1,000 an ounce. Then we took the value of gold as a percentage of total reserves (computed as the total of foreign exchange reserves and the value of gold). Once again, we were startled to discover that 80% of the total reserves of the US are backed by gold. True gold accounts for just 1.8% of its GDP. But then, it is larger than the world average, which stands at 1.6%.
In fact, next in the pecking order come Russia and India.
And lest people forget, Russia has emerged as the largest producer of gold in the world, and can only see its reserves of gold go up in the coming years.
China, which has begun purchasing gold, still has only 1.97% of its total reserves as gold.
China's biggest worry is that if it continues purchasing gold, it will cause the price to go up, thus adding more value to the US reserves.
India could be in a better position because its gold holdings in private hands are reckoned to be at between 20 and 100 times larger than the government's holdings. That is why many economists have been making a strong case for issuing gold bonds so that the gold thus collected by the government can be used as collateral for foreign exchange borrowings, thus bringing down the interest rates. Gold is a better collateral for most banks than the country ratings of borrowers.
Given the fact that the world is in for a huge financial turmoil, at least in the coming years, it may not be such a bad idea to have more gold as a reserve without creating a market demand for the yellow metal and thus fanning an asset bubble.
Such a move would serve three purposes. First, it would persuade Indians to come forth with their gold and bring it into productive use. For doing so, they would be guaranteed return of the yellow metal after say 5 or 10 years and still earn 2-5% as simple interest on the average price of gold during the year.
Second, it would make the country that much more resilient against foreign exchange fluctuations. It would make the rupee that much stronger -- a major advantage when India has to go in for infrastructure upgradation and capital imports.
Third, it would lower the cost of debt servicing. But it would mean fewer rupees for those who have US dollars stashed away in undeclared accounts overseas.
So will there be any takers for gold bonds in India? Can India hope to see its currency stand out stronger than that of the US? The jury is out.
