RBI purchased 200 Tonnes of IMF Gold: Loosing Faith on US Treasury Securities

Recently The Reserve Bank of India (RBI) has sold US Treasuries to fund its Gold purchase from the International Monetary Fund (IMF). In the 1st week of November 2009, RBI purchased 200 tonnes of IMF Gold for $ 6.7 Billion, increasing the share of gold in its reserves by 250 basis points.

Well, Let me explain you the logic behind this move in simple language.

Well, see. US Dollars is the reserve currency for almost every country in the world. Whenever any country around this world has a surplus money, they buy US Dollars in the form of US Treasury Securities (Bonds, Bills, Notes..etc). This is a trend since past several decades worldwide. Because US Dollar is considered as the most stable currency around the world.

And because of its stability it is the number one reserve currency of the world.

But, well What happens if you print more and more money and push it into the circulation? Well, the newly printed money will dilute the purchasing power of the existing money. It’s like adding more and more water in the lemonade. Each time, you add more water in the lemonade, it will dilute the taste of that lemonade. This is true about money also.

Each time when the central banks and governments all around the world print more money and push it into the circulation, the purchasing power of the existing as well as newly printed money gets diluted. Now, let me tell you that what happened in USA in past 2 years?

Since 2007, US Government has printed literally $ 1.2 Trillion out of thin air and pushed it into the circulation. US Government has printed more than double amount of money in just past 2 years which it has printed in last 100 years…!!!!

Yes… Up to 2007, The US Monetary base was $ 800 Billion. It means that US government has printed this much amount of money over the time probably somewhere around 1913 onwards up to 2007. But today its Monetary base is $ 2 Trillion….!!!!!

Now, it means that from 2007 to 2009, US Government has printed literally $ 1.2 Trillion and pushed it into the Monetary System (Circulation).

And that’s why Investors and governments all around the world are no longer interested in US Treasury securities. Because sooner or later the US Dollar will become worthless if they keep printing money like this.

And that’s why this time Government of India has planned to sell some of its Dollar reserve to buy a Gold.

Now, You tell me that, Is it Fair to Print money like this in the Economy?

I am waiting for your comment…!!!