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BW Businessworld

Book Extract: Gold Diggers

So where will the gold come from to meet India’s, and the world’s, continuing demand? ...gold remains the rarest, most expensive and most difficultly won prize to extract from the earth, writes Nanda Menon

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On November 25, 1996, the New York Times published an article claiming to have solved the mystery of the Gold-Digging Ants of India. The rage at that time, from Silicon Valley to Bangalore was the internet and the rising technology sector. The old economy was dead and nobody was interested in anything unless it had a dotcom appended to its name. The stock market multiples of “bricks-and-mortar” companies languished and investors from central banks to the regular man-in-the street lost interest in physical assets like gold and silver as they chased the next big thing. So, the New York Times’ article saying that it solved the mystery and whereabouts of the Gold-Digging Ants of India, was pushed to some obscure page of its copy of that day, hidden well behind the stories of Silicon Valley start-ups.

The gold price had fallen by then from a peak of US$ 850 per ounce in 1980 and on that November day was just US$ 367 an ounce. The Rupee in that year averaged an exchange rate of Rs.33 to the US dollar and the gold price was a meagre Rs. 3524 per 10 grams. The dot com era was beginning and gold was passé. As the clamour of the dotcom frenzy grew, the gold price kept languishing until it bottomed at US$ 253 in July 1999. A certain man by the name of Gordon Brown was Chancellor of the Exchequer in the United Kingdom, its equivalent of the Finance Minister. He would ten years later, as Prime Minister of Great Britain, claim the mantle of having saved the world from financial disaster during the global financial crisis of 2008. But he will probably be remembered more ignominiously in economic history for a different action. Almost as if calling the final act of capitulation to the dotcom era, he took the momentous decision of announcing to the world that the Bank of England was selling off its ENTIRE gold reserves. The decision shocked the financial markets and an already battered gold price fell another 10%.

Yet the world, and Gordon Brown, could not have been more wrong. After plunging down to what would later be infamously known as the “Brown Bottom” of US$ 253 per ounce, one of the greatest bull markets in the history of gold was about to begin which would see its price rise dizzyingly to US$ 1921 per ounce in 2011. The chart below shows the performance of gold since 1996 in rupee terms, a staggering six fold increase.

A gold-digging ant would certainly have been one of the most valuable machines for wealth creation that anyone could have owned in the period!

So what were these gold-digging ants that the New York Times claimed it had solved the mystery of? If only we could all have a few! The New York Times claimed that it had found the answer to a story that had first been told more than 2500 years ago. So great was the fame of India’s legendary hordes of gold that both the ancient Persians and Greeks dreamt of it and the tale was repeated well into the Middle Ages. So was the tale of the gold-digging ants just an ancient myth or, as the New York Times claimed, was there in fact some truth to it that still could be found today?

The first instance of the gold-digging ants appeared in the Histories Apodexis of Herodotus (ca. 430 BCE) where they were called khrusonmurmekon (gold-ants).

According to these Histories, somewhere in the northern plains of India there existed a large desert in which these gold-digging ants thrived. They grew to be so large that they were about the same size as dogs and foxes. Like the ants we know of today, they burrowed deep underground and heaped up sand, like the mounds created by termites or white ants.

But there was one difference. These ancient sands were brought up from deep underground which was abundant with veins of gold. And consequently, the sand itself was richly textured with grains of gold that glistened in the desert sun. All the people of the northern plain needed to do was to pan out the gold from these mounds of sand.

Unfortunately, there was also a catch – the ants were so fierce that they would kill and destroy any person who tried to steal the grains of gold. To make matters worse, the ants had such a strong sense of smell that even if someone had successfully managed to sneak in and steal any grains of gold, the ants would have sniffed them down and destroyed them to make sure there was no escape.

The ancient Indians however were smarter than the ants and in one of the earliest examples of jugaad, they came up with a cunning method to outwit the ants. When they went to steal the gold from the ants, each person took with them three camels, harnessed side by side. The two on the outside were male, and the one in the middle, which he rode, was a female that had just given birth. On this trio of camels, the Indians would arrive at the mounds of sand at the hottest time of the day when the ants were deep underground seeking shelter from the sun.

Making most of the ants’ absence, they would plunder the golden sand in great haste and try to escape before the ants could return. They needed to get away with great speed because otherwise the ants would smell them out and chase them down across the desert. The male camels would be ridden hard until they were exhausted and they would drop as fodder for the ants. The female camels however, would be so desperate to get back to their young, that they would find extra reserves of strength and carry the Indians to safety across the desert.

So why were our forefathers willing to risk life and limb for the pursuit of gold 2500 years ago? And why still, in spite of the advent of modern currencies, credit cards, mobile phone payments and electronic payment systems, does gold still hold such a central place in the Indian psyche? The fundamental desire to own gold in India is no different from mankind anywhere else. As man evolved from subsistence agriculture to barter and then organised trade as civilisations came into being, we needed an honest, reliable medium that could keep score. It was essential that such a medium fulfilled two inalienable characteristics. Firstly, it had to be rare and impossible to reproduce so that it could only be traded and possessed by those who had earned it. Secondly, it had to be durable so that it could act as a store of value across time and generations. Gold, as we shall see in the next few paragraphs, met both these requirements abundantly.

Gold’s attraction as an investment or store of value across the millennia comes primarily from its extreme rarity. According to the World Gold Council, as at the end of 2012, there were only 174,100 metric tonnes of gold in existence above the ground – the sum total of gold mined since the beginning of civilisation. This means that if every ounce of all the gold that has ever been mined in the history of mankind was put together side by side and one above the other, it would make a cube that was just 21 metres in any direction – barely more than the distance between the wickets on a cricket pitch!

…You can see now why it perfectly fulfils the role of keeping score to the game of economics. The players can’t simply produce more and debase its value. Even in 2013 world gold mining output was barely over 3000 tonnes, an increase in the size of the pile of just 1.7% and well below the IMFs figures of global GDP growth in 2013 of 3.4% and substantially less than the same 3.4%/ GDP growth recorded in 2012. Even in 2014, world mine production grew by only 2% compared to global GDP growth of 3.4%again given by the IMF in 2014.

Hence the ratio of the world’s stockpile of gold, relative to its total GDP stays broadly constant, if not tightening in gold’s favour.

...besides its attraction as a store of value, gold also had other attractions. It was shiny and pleasing to eye as well as being malleable, ductile and easy to work with – the perfect medium for jewellery. So this combination that made gold both a repository of value as well as an element of beauty made gold a highly desirable substance – not only did it make you wealthy, you could flaunt it as well!

As Jill Leyland puts it so elegantly, gold’s appeal to humans lies in two elements: the human need for security and the desire to own something of beauty. These are human needs that do not change over time. And from the author’s perspective these needs apply to Indians just as much as they do to humans all around the world.

So why then does India stand out more than other countries in our desire to own and accumulate gold?

One major reason in my view is India’s tumultuous political history over thousands of years and the need for a store of value and unit of account that transcended it. With the exception of brief periods when the Indian subcontinent was dominated by empires, for a large part of its history India has been made up of kingdoms whose borders and potencies were never constant. Gold proved to be a particularly useful store of wealth in this circumstance. While rulers and borders could change, there was permanence in the value of gold. Imagine living in such an era when there was high likelihood in your lifetime that you could find yourself under a different dynasty or annexed into another state. A currency, like the paper currency we have today, that is a promissory note of a single impermanent government would offer little security. Unlike such modern currencies, there was an intrinsic value to gold coinage which had little to do with whose crown or insignia was stamped on it. It was a valid store of value and means of exchange in both times of peace or war. Its high value also meant that its coinage, jewellery and bullion were a convenient size to carry around, hide or store in times of conflict. For this reason, gold became the chosen store of value for our ancestors.

....In India, this gold flowed into the coffers of its many trading kingdoms resulting in an accumulation of wealth far beyond anything before in history. An indication of this scale can be seen from the recent saga of the Sri Padhmanabhaswamy Temple in Thiruvananthapuram. After a lengthy dispute between the erstwhile royal family of Travancore and devotees of the temple, over the secret contents of its many vaults which had been sealed for centuries, the Supreme Court of India finally ordered that one of these vaults be opened.

On the 30th of June 2011, a group of officials entered the sanctum sanctorum of the temple and attempted to enter the vaults. It took them 5 men and over 30 minutes to move a giant stone slab that blocked a tunnel into the ground. One of them, Mr Balagovindan is quoted:
“When they removed the granite stone, it was almost perfectly dark, except for a small amount of light coming in through the doorway behind us. As I looked into the darkened vault, what I saw looked like stars glittering in a night sky when there is no moon. Diamonds and gems were sparkling, reflecting what little light there was. Much of the wealth had originally been stored in wooden boxes, but, with time, the boxes had cracked and turned to dust. And so the gems and gold were just sitting in piles on the dusty floor. It was amazing.”

.... So, back now to our gold-digging ants. What was the New York Times explanation of this ancient mystery? The article interviews a couple of present-day French explorers who ventured into some of the most inaccessible regions of the Himalayas in the uppermost reaches of the Indus River. There, between the lines of opposing soldiers and the sound of gunfire, the French said that they found animals called marmots that lived in burrows that were deep underground. As they dug these burrows the marmots brought up to the surface mounds of gold-bearing soil. The indigenous tribes living there say that they have a long tradition of collecting specks of gold from these mounds. But the amounts collected are small and sitting across the line of control, these deposits are not likely to be exploited significantly any way soon.

So where will the gold come from to meet India’s, and the world’s, continuing demand? ...gold remains the rarest, most expensive and most difficultly won prize to extract from the earth. There are no gold-digging ants or magic wands that can produce it. It is quite literally as rare as stardust.