Peter Brimelow: Why gold and gold shares take different paths

Section:

By Steve Johnson
Financial Times, London
Tuesday, May 3, 2005

http://news.ft.com/cms/s/c365f284-bbeb-11d9-817e-00000e2511c8.html

Fears of a weakening appetite for dollars among Asian central banks
were re-ignited on Tuesday when India became the latest nation to
talk of reserve diversification.

India is secretive about the composition of its reserves, which have
ballooned by $13.5 billion since January to a record $142.6 billion,
the sixth largest in the world.

But S.S. Palanimanickam, the junior finance minister, said in a
written reply to a question about New Delhi's exposure to the
dollar: "Appropriate adjustments are made in the currency
composition of foreign exchange reserves from time to time depending
on various considerations ... like benefits from diversification of
currency risk."

The euro is an important currency for the Reserve Bank of India, he
added in comments that will intensify speculation that New Delhi may
be looking to reduce its exposure to the dollar.

India caused some jitters for the dollar earlier in the year when it
approved plans to use its forex reserves as collateral to fund
infrastructure investment, even though such spending has been
limited to $2.3 billion in the next 12 months.

Behind this veil of secrecy, India is believed to have started to
switch into the euro and, to a lesser extent, sterling and yen.

"I believe they are gradually shifting away from the dollar," said
Hans Redeker, global head of forex strategy at BNP Paribas.

Mr. Redeker sees India as one of many Asian nations looking to earn
a higher risk-adjusted return from reserves but says the Reserve
Bank of India will be wary of seeking higher yields in the US
corporate and junk bond markets.

The Bank for International Settlements said in March that India's
banking sector, including commercial banks as well as the RBI, held
just 43 percent of its deposits in dollars as of September 2004,
compared to 68 percent in September 2001.

As for the central bank, analysis by ABN Amro comparing movements in
total reserves with fluctuations in the euro-dollar rate suggests
that about two-thirds of its reserves are still held in dollars.

Asian reserve diversification could be disastrous for the dollar --
with the US needing to attract $2 billion a day to fund its current
account deficit -- if central banks were to stop buying Treasuries
and actively sell dollars instead. Redeker predicts this, with the
dollar's share of global reserves likely to fall back from 64
percent at present to the 53 percent level of the early 1990s.

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