India Shocks World by Investing $6 Billion in Physical Gold

The Indian government might have started a very alarming trend by choosing to invest $6 billion in physical gold. Yes, at a time when volatility reigns supreme and economies are pondering where to invest their foreign currency assets, gold is an obvious choice. Or is it?

Gold is definitely an obvious choice, but most countries wouldn't dare think of moving their current investment out of United States treasuries into any other asset class. Why you ask? Simply because most of the world is invested in US treasuries! If they start a trend of moving away from it, this could lead to a major downward spiral resulting in panic selling and the value of the dollar falling further. For example, China is the largest investor in US securities. It holds about $1 trillion in government treasury bonds. The dollars value has plummeted about 18% versus the Euro over the last 6 months and the Chinese are not very happy to see their investments losing 180 billion dollars due to currency depreciation. But if they choose to remove some money out of the dollar bonds into say Euro bonds, this sends a very negative message to the rest of the world. If the largest investor in US securities is losing faith in the country, then something must be wrong and voila! You have a panic situation - and who suffers the most in this? China.

I had published an article on AC recommending one and all to invest in gold. The Indian government sure seems to share the same sentiment. Although the amount the Indians have invested is not significant, its worrying because it can lead to a trend which could snow ball into a steep fall. The primary benefit of gold is that it isn't volatile and that it serves as a hedge to inflation.

US treasury yields are appallingly low. The US may be forced to raise rates sooner than they would have wanted only to combat the significant depreciation of their currency as opposed to other currencies.

Other Asian economies which don't have large foreign exchange assets are more worried about their investment values deteriorating and watching a large economy like India choosing to invest in Gold may give them comfort and make them play a scary game of follow the leader.

Rest assured the world heavy weights are not taking this lightly. Any chance of such a move will be dealt with swiftly and with gravity. The last thing the world needs now is for people to lose faith in their largest asset class.

Source:
' Gold Retains Potential as Safe Investment Haven', Hindu Business Line, Nov 9th, 2009