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Gold's value in government vaults glitters amid economic gloom

In a report submitted to the PM, the Intelligence Bureau says the value of gold lying in the government's vaults has shot up by a phenomenal Rs 100,000 crore in a short span of two years.

SPS Pannu | February 25, 2012 | Updated 10:21 IST

There is a golden lining in the dark clouds hovering over India's economy. Divulging a nugget of information that will give Prime Minister Manmohan Singh reason to smile, the Intelligence Bureau (IB) has told him that the value of gold lying in the government's vaults has shot up by a phenomenal Rs 100,000 crore in "a short span of two years".

In a report submitted to the PM that has been accessed by Mail Today, IB director Nehchal Sandhu stated: "The sharp rally in the price of gold has helped bolster the overall value, as has the 200 tons purchased by the Indian government from the IMF (International Monetary Fund)."

The RBI had purchased 200 tons of gold from the IMF in November 2009 at $ 1,045 an ounce (28.34 grams), in a transaction valued at close to $ 7 billion. The price has now risen to $ 1,781 an ounce.

The document also indicates that the IB has diversified from gathering security-related and political information to the more cerebral field of economic intelligence.

In 1991, Singh had taken over as finance minister against the backdrop of the rueful ignominy of India's yellow metal reserves being shipped out to be pawned with the IMF for raising a loan to finance the country's imports.

By the end of 1990, India was in the midst of a serious economic crisis. The government was close to default, its central bank had refused new credit and foreign exchange reserves had touched such a low that the country could barely finance three weeks worth of imports.

India had to airlift its gold reserves to pledge them with the IMF for a loan. The forex reserves stood at a paltry $ 1.2 billion in January 1991. Forty-seven tons of gold was airlifted to the United Kingdom to pledge it with the Bank of England and 20 tons to the Union Bank of Switzerland to raise $ 600 million.

The Chandrasekhar government's decision between May 21 and 31, 1991, resulted in a public outcry that the country's entire gold reserves had been pledged against the loan.

On July 18, 1991, then finance minister Manmohan Singh concluded his statement in Parliament by stating: "The export of gold was a painful necessity. However, I am confident that the various measures we have now taken will, over a period of time, lead to a significant improvement in our balance of payments. It will be my sincere effort to work to bring back to India as early as possible the gold we have sent abroad."

The gloom gave way to cheer some time later when he stated: "Our government, under the leadership of P. V. Narasimha Rao, is happy to announce that we have redeemed our pledge made to the country through Parliament. All the loans taken through pledging the RBI gold of 47 tons stand repaid and the gold has now become unencumbered."

Singh added: "It has been decided to exercise the repurchase option in respect of 20 tons of confiscated government gold which was sold by the State Bank of India with the repurchase option. This gold would be restored on the due dates of repurchase commencing November 25 and ending December 4, 1991."

Divulging the government plan, Singh further revealed: "It is our intention to transfer this gold to the RBI and thus add to our official gold reserves. The government is firmly committed to restoring viability in our external payments position and is taking action on several fronts in pursuit of this objective."

Now, 20 years later with Singh at the helm of affairs as Prime Minister, the tide has turned to land him on top of a mountain of the precious metal weighing close to 558 tons. Cold comfort at a time when the economic parameters are not exactly in the pink of health.

The rationale of buying gold to boost the government's portfolio was that it would appreciate more than the US dollar. The logic has worked. And it is a strategy that has paid in spades.

The welcome news came in one of the reports the IB director submits to the PM every month on the state of the economy and the way commodity prices are moving. These range from precious metals such as gold and silver to food items including potatoes, onions, sugar and pulses.

The IB report states that it expects gold prices to stay buoyant. It points out that the Bank of Korea purchased 18 metric tons of gold from the IMF in October 2011 and China's gold bar investment demand may almost double to 270 tons for 2011 compared with 141 tons in 2010. India and China together account for half of the world's gold demand.

According to the World Gold Council report released this month, demand for the yellow metal in China in 2011 grew for both jewellery and investment. "China's jewellery demand increased every quarter of last year and was the largest single jewellery market worldwide for the second half of 2011," it pointed out.

In India, where gold is widely purchased during festivals and weddings, the demand in 2011 declined slightly to 933.4 tons as against 1,006.3 tons in the previous calendar year. This was owing to a drop in jewellery demand following volatile prices and a weak rupee.

Jewellery demand in the country dipped to 567.4 tons in 2011 from 657.4 tons in the previous year, though demand for gold coins and bars rose to 366 tons from 348.9 tons in the reviewed period, the report stated.

However, the global demand for gold is expected to remain strong in 2012, the WGC said. Last year, global gold demand rose marginally to 4,067.1 tons (worth an estimated $ 205.5 billion) - the first time that the global demand exceeded $ 200 billion and the highest tonnage level since 1997, it noted.

The IB report also mentions that the gold-silver ratio rose from a low of Rs.31.53 in April 2011 to Rs.52.38 in November, indicating that silver is getting increasingly cheaper when compared to gold.Courtesy: Mail Today 

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