The Goddess of Gold

To a young girl, gold jewelry is seen as mere ornaments to hang around her neck and from her wrists. To India’s inhabitants, and to today’s investors, gold means much, much more.

It was July 1, 1991, the day of my cousin’s wedding. "You have to wear more gold, Sala. It’s auspicious," my mother said, as I was getting ready. As a teenager growing up in India, I hated wearing traditional gold jewelry. It was not fashionable enough. Only old people wore gold jewelry. I was determined not to wear all that gold to the wedding. I would create all the drama I could to avoid it.

On the same day, a different kind of drama was unfolding in the city of Bombay, India’s financial nucleus. Ironically, it would involve gold, too. On July 1, 1991, the Reserve Bank of India (RBI) was in sheer chaos. Foreign exchange reserves neared zero, and the country’s debt was spiraling out of control…

July 1, 1991, was the day India went bankrupt. It was the day the emerging Asian superpower’s external debt reached a record $69 billion – a third of its GDP. Thanks to the Gulf War and soaring petroleum prices, India’s imports were so exorbitant that the country could not pay for them. How was it going to service its mounting debt? With no foreign reserves and weak export income, how was the Reserve Bank going to pay for India’s costly imports?

Those were daunting questions that weighed on the minds of economists, investors and individuals alike.

What weighed on my mind that day was just one thing: How could my mother force me to wear ugly, ancient, gold jewelry? What will my friends think of me? "It is so uncomfortable," I tried to protest. "So what? Twenty years from now it will be worth so much more, and you will be glad you have it. Besides, everyone at your cousin’s wedding will be seeing how much jewelry you’re wearing, so you better put on a couple more bangles." It seemed like I had no defense. I panicked.

India’s Gold Tradition: Worth Nothing

The Reserve Bank officials panicked, too; they could turn nowhere for financial aid. They were blacklisted by Standard & Poor’s, Moody’s and other credit rating agencies. Investor confidence in India was at an all-time low. No international bank, no country, no institution, no individual was willing to put a penny into the country. And why should they?

The Indian rupee was worth nothing. In 1991, one rupee fetched 0.002 U.S. dollars. The rupee was a mere fraction of a cent.

To make things worse, there was intense political turmoil. The government was unstable. Rajiv Gandhi, a former prime minister, had just been assassinated. India’s financial house was incapacitated. There was no way out of this vicious cycle of debt.

No way out, except borrowing against the country’s most important asset – gold.

Back home, my mother’s will to have me wear gold had prevailed. On the way to the wedding she said, "Someday I hope you will appreciate that we bought you gold." Embarrassed as I was, I went to my cousin’s wedding dressed in traditional gold – just like everyone else there.

On July 1, 1991, when India was facing sure bankruptcy, the RBI had to pull an embarrassing move that saved the entire country from certain doom and gloom. Then-Finance Minister Manmohan Singh pulled the trigger and sold about $200 million worth of confiscated smuggled gold (there was a thriving black market in gold to meet growing demand).

The RBI shipped more of its reserves to the Bank of England as collateral and obtained a $400 million loan to correct its balance of payments and finance its debts. In other words, pledging the RBI’s gold was the only savior. It was also a huge embarrassment: A country that worshipped gold as an auspicious item, now had to ship it away to save itself.

India’s Gold tradition: Economic Safety Net

The RBI used gold to save the country from spiraling debt. It used its gold to keep the banks open and in business. It used its gold to keep the economy running. And since 1991, India has gone on to receive an investment grade rating by Moody’s, and the stock market is up nearly 400%. India now has a healthy trade surplus of $31 billion and owes the International Monetary Fund absolutely no money.

Gold is hugely important in India – both as an economic safety net that saved it from falling deeply in debt in 1991, and as a personal store of real wealth.

This tradition of gold has ancient roots. In 16th century India, people stored their wealth in the form of gold and other precious metals in order to keep it hidden from the taxman. Even today, Indians hoard gold and worship it.

India’s goddess of wealth is portrayed with gold coins falling from her palms to symbolize prosperity. She is sometimes even referred to as Swarnalakshmi, or the Goddess of Gold. Gold is considered so auspicious, that no wedding is conducted without the exchange of large quantities of gold.

Weddings aside, Indians hoard gold no matter what the economic climate. They venerate the Goddess of Gold. And in today’s easy-money economy, they continue to amass gold – not only because it is auspicious, but also as a consequence of two specific economic environments.

First, the Indian stock market is relatively unsophisticated. The total market cap of the BSE Index as of April 2004 was $226 billion. The Dow Jones Total Market Index for the United States, on the other hand, had a market cap of about $12 trillion. Trading volumes are comparatively low, derivative trading is a relatively new concept and the Indian stock market is not very accessible to the common man. Investment vehicles are few and only available to the wealthy. Most families, therefore, simply hold gold.

Second, for those in remote villages with no banks or safe-deposit boxes, storing cash at home can be dangerous. Instead, they invest in gold jewelry and wear it on their persons. Even the poor own at least a small amount of gold.

India’s Gold Tradition: 10% of All the Gold in the World

It is estimated, as a result, that Indian families own anywhere between 9,000 and 15,000 tons of gold. At today’s dollar value, that is about $115-192 billion worth of gold…approximately 10% of the entire world’s supply!

That is a huge safety net.

This country owns nearly $200 billion worth of an asset that is appreciating in value and has just embarked on a phenomenal bull run.

Gold can be sold or pledged in times of financial need. In some circumstances, it is the most liquid asset a family owns. It may be easier to liquidate one’s gold than to get a bank loan. Unlike many popular financial assets, gold is not debt-backed. Gold is no one else’s liability. India’s vast gold reserve is, therefore, an insurance against financial failure.

Will this emerging superpower see the crisis of 1991 repeat itself? It is highly unlikely. After all, the man who was finance minister in 1991 and opened up the Indian economy to global trade is now the country’s prime minister. India has regained its investors’ confidence and is a destination for foreign investment.

But should they ever face a financial crisis, the people of India have a colossal hoard of gold to fall back upon.

The Goddess of Gold is smiling upon them.


Sala Kannan
for The Daily Reckoning
November 16, 2004

P.S. My sister called last weekend. "You won’t believe what Mom made me wear to yesterday’s party," she complained. I think I can make a very good guess! Some things will never change…and that just reinforces my faith in gold.

Mary Meeker is still alive. Still employed. And still delusional.

You remember Mary, dear reader. She along with Henry Blodget, Jack Grubman and a few others were notorious shills for the Internet Revolution…the Information Age…and the New Era of the late ’90s. They touted tech stocks for Wall Street. The game was pretty simple. While their employers made billions helping the companies go public, the touts pumped up the stocks.

What a business!

But after the bubble blew up, angry investors howled. They wanted to blame someone other than themselves. So, the Wall Street firms bravely handed them a few heads. Then, regulators and prosecutors saw a chance to get their names in the paper. And when it was all over, Meeker was the only one still standing.

And now Ms. Meeker is having another go at it.

Another "Internet boom is under way," she says. The bubble in tech stocks has been reloaded.

According to Meeker, the techs got a little ahead of themselves in the late ’90s…but this time the boom is "for real."

The combined market value of eBay Inc., Google Inc., Yahoo Inc., Yahoo Japan Corp. and Inc. was more than $230 billion last week. Ebay is selling for nearly 100 times earnings; Yahoo has a P/E of 126. Even our own friend Amazon, that Great Big River-of-No-Returns, has a P/E of 43.7. What is amazing is that it has a Price/Earnings ratio at all; the company always had plenty of P, but its E is something relatively new…and unsteady. But Google tops them all with a P/E of 222. The search engine is now worth more than GM.

"Join the crowd," says Jim Cramer, who is still making a public spectacle of himself. Cramer joins Meeker in urging investors to do likewise. "The downside is very limited here because the feeling you felt in your stomach when the market opened up huge is the feeling that comes from recognizing, ‘Darn it all, I gotta get in.’ Because you do."

Happy days are here again! We remember what joy we took in making fun of the tech stocks…and their touts, back in the glory days of the late ’90s. This should be just like old times. We just love it when people take leave of their senses; they are so entertaining.

People pay outrageous prices for new technology because they are savvy enough to appreciate the way the world works, but not quite savvy enough to see how it works on them. Cramer, Meeker, etc. notice the grand public spectacle of a bubble market, but don’t seem to realize that they, too, are bit players of the vast cast of characters that turn the whole thing into such a marvelous show.

They see, for example, that GM is already yesterday’s news. The world turns…and now GM makes cars only to finance them…and it finances them only to get enough money to pay health and retirement benefits for past and present workers. GM is, like, so 20th century, if you know what we mean. The process of creative destruction has rolled right up to GM’s plants and threatens to level the entire operation. Now, there’s new technology, a new era and new industries for the 21st century – such as Google and eBay!

But at a P/E of 222, if nothing changed a buyer of Google would have to wait until the year 2226 to get his money back. A lot could happen between now and then. Even more creative destruction. The process of destroying "old" industries in order to make room for new ones, didn’t stop the day Google went public. For every new technology, there is still newer technology waiting on the IPO calendar. For every mad bubble, there is a mad bust. And for every famous clown, such as Cramer or Meeker, there must be 10,000 anonymous investors ready to go broke following their advice.

More news, from our friends at The Rude Awakening:


Eric Fry, reporting from New York City…

"’The global monetary system is a kind of bellows. United States blows dollars out into the world’s payments stream, and foreign central banks blow back the currencies with which they absorb the dollars. It’s a huge, transoceanic money-propagation apparatus. The news is that it has begun to wheeze.’"


Bill Bonner, back in London:

*** James Boric sends us news of a major new high for stocks…

The Russell 2000, a.k.a. the "small-cap index", hit an historic high yesterday – closing at 623.86. Who cares you say? Well, consider this.

The Russell 2000 is the ONLY major index to reach its highs from the bull market of the 1990s. As I type this morning, the Dow Jones is still 1,358 points off its high of 11,908. The S&P 500 is off 369 points from its high of 1,552. And the once-mighty NASDAQ is off a breathtaking 2,094 points from its high – trading at just 40% of its 2000 level.

Meanwhile, the Russell 2000 is a full nine points ahead of its peak in March 2000. And folks, there are no signs of a letdown.

*** Is there any group in America that has not been offended at one time or another by the Daily Reckoning? If so, it won’t be our fault. The latest groups of offendees are professors of academic philosophy. We have received two letters recently. Both said, in effect, that we don’t know what we are talking about. The first said our reduction of Wittgenstein’s Aphorism Number 7: "If you don’t know what you’re talking about, shut up" – misrepresented the great man’s work.

The other argued that our description of Jacques Derrida’s oeuvre was sophomoric. "’Deconstructionism’ doesn’t mean what everybody thinks it means," he says. Of course, this is the sort of comment made by economists too, when they point out that "inflation," as used by the classical economists, doesn’t really mean rising consumer prices. And, of course, every economist knows that inflation doesn’t mean exactly what people think it means…just as everyone who read Derrida’s obituaries knows that "deconstruction," as the word was used by Derrida, doesn’t mean exactly deconstruction, as the word is popularly employed. But who cares? Hardly anyone knows what Derrida meant. Why not use the word, as it is popularly understood?

Besides, we can’t remember what we wrote on the subject; we don’t know anything about Derrida other than what we read in the papers. That is all we thought it was worth.

That must be what miffs the professors. They’ve built their careers on knowing things that the average man – including your editor – judges barely worth knowing at all. Like a tax lawyer who has mastered some obscure subsection of the IRS code, they’re determined to squeeze every bit of self-aggrandizement out of it that they can. How they must delight in making freshmen quake and coeds quiver!

Well, that’s what we would do in their place

*** Knowing anything at all takes an investment of time and energy. When people spend their whole lives getting to know something…rarely will they admit that the time was wasted. Once invested in an idea, a religion, a stock, or a career – a man can’t help but believe in it. He damns the man who questions his thinking. If he has the power to do so, he burns him at the stake.

But imagine a man who spends his life learning to recite the Bhagaved Gita by heart…or logarithmic tables? Or anti-trust law? Or Icelandic sagas? Or caterpillars?

Imagine a man who spends his life writing The Daily Reckoning? Oh, you unforgiving readers…have pity on him. Pardon his errors of judgment, fact or style.

And when his laptop goes dark and his old guitar finally goes silent…please say an "Ave" for him, won’t you? For has not the poor man wasted his life as much as a philosopher, lepidopterist, or gutter bum? Who can say? Besides, we can’t all be bartenders.

*** In the meantime…we sneer and laugh again. This time, not at philosophy or the tax code, but at art. There too, people have made careers and fortunes by doing things that are probably not worth doing. And there too, is a market as bubbly as tech stocks.

Now, we confess immediately, we know nothing about contemporary art. This, we believes qualifies us as impartial and objective, as we are completely untainted by prejudice or information. We have nothing invested in it, and nothing to lose by commenting honestly on it but our reputation, which is to say – not much.

There are two big spheres of human action – private and public. In private, we look at contemporary art and wonder, not why people would buy it, but why they would accept it if it were given to them for nothing. But if a man wishes to pay $5 for a scribble to place on his wall…if he enjoys looking at it…so much the better.

But that, we believe, is as exceptional as an honest senator. Much more often, a man buys a work of contemporary art to embellish his own opinion of himself as a hip and progressive fellow. Law, public relations, and consulting firms pay millions to place the most appallingly silly things on their walls for the very same purpose – to advertise that they are "with it."

And guess what? Contemporary art is booming. Last week, Sotheby’s and Christie’s sold $186 million worth of it – with many works going for record prices. One of Cy Twombly’s 1971 squiggles, for example, went for $5.38 million.

The Daily Reckoning