Alasdair Macleod: The Indian Government’s Gold Folly

gold banIndia has a history of gold ownership, spurred by long-term experience of a weak rupee. Only a fool leaves rupees on deposit, because they usually buy less and less every year. Alternative stores of value, such as equities, have only entered the mainstream on the back of the economic boom, and their performance on the whole has been nowhere as good or certain as gold. He knows something Westerners do not: the rise in the gold price is due to the currency going down. And so long as the currency goes down, it makes sense to continue to accumulate gold to ensure family savings retain their value. Nothing else gives this protection, and the price paid today or tomorrow is a secondary consideration. So what is the Indian government’s real agenda? There are three possible considerations:


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By Alasdair Macleod:

Since independence gold has been the best store of family wealth by far. Today’s grandparents were buying it at 170 rupees to the ounce in 1965, and since then there have been festivals, children born, children married and grandchildren as well. The responsible family patriarch has saved for his family’s wellbeing and future, and gold has been central to his savings. And what a wise man he has been: gold today is about 75,000 rupees an ounce, having gone up 440 times in his lifetime measured in rupees.

 

Governments don’t like this mainly for ideological reasons. They don’t like the idea of some people getting rich from doing nothing. Furthermore, they are in the business of transferring wealth from savers and workers to pay for political objectives and also to assist their favoured pressure groups. As well as getting its income legally through taxation, governments print money. Printing money devalues the purchasing power of people’s earnings and savings without them realising what is happening. The benefit of gold ownership is that it protects people from this hidden tax of monetary inflation, which leads over time to a lower and lower currency. And the lower the rupee goes, the greater the reasons to buy more gold.

Until recently the Indian government has allowed families to buy imported gold, having repealed the Gold Control Act in 1990. The lesson from this legislation was that it merely drove gold dealing onto the black market, and did nothing to stop individuals getting hold of gold if they wanted to.

However, the Indian government is not fully in favour of free markets and seeks to control many aspects of Indian life, including gold ownership. This is why the State and the financial sector (which is licensed by the State) are now encouraging ordinary people to buy Exchange Traded Funds and e-gold instead of physical bullion.

This amounts to an attempt to introduce western capital market practices into mainstream Indian life. However, it introduces new risks, which the vested interests of government and financial promoters do not tell you about. ETFs and e-gold do not require the backing of physical gold, only a promise to pay its value. Instead of being backed by gold, these financial substitutes need be no more than a book entry on a computer, so long as the issuer retains the confidence of the investor.

This is exploited to the full in western capital markets, where mountains of paper gold are transacted without delivery of any physical metal taking place. This is the world that ordinary Indian savers are being encouraged to join, where instead of actually holding physical gold they are being offered a paper entitlement. With physical possession of gold, it is yours and no one else’s. An ETF, or e-gold (whatever that is) depends entirely on the integrity of the financial intermediaries, and their integrity in turn depends on the rules provided by government.

The government’s agenda

So what is the government’s real agenda? There are three possible considerations. The most obvious and commonly cited of the three is that the government sees increasing imports of gold contributing to the trade deficit. Therefore, if it can discourage imports of gold, it believes the trade balance will correct.

This economic interpretation is uninformed and frankly naïve. Logically, the source of trade deficits is not the private sector, but always the result of government intervention. Put simply, if private persons or their businesses import something they pay for it, either out of earnings or savings. If they pay for it by borrowing the money, they always make arrangements to pay the money back so that any deficit is temporary. Governments do not have these constraints, being able to finance trade deficits through trade agreements at an inter-governmental level, by borrowing money they do not intend to repay, or by simply printing money. The imports of gold are therefore no more than an allocation of private sector savings, not additional spending. So the trade deficit argument is mistaken.

The second reason is that the government thinks that savings can be better deployed for the good of the nation by being spent on consumer goods, or invested in either government bonds or in businesses. The idea that government decides how much people should spend and how much they should save is economic intrusion into family life, and as we have seen, the returns on alternative investments have been unattractive compared with gold.

The third reason is less obvious but probably the most important. Demand for gold from Asian countries has resulted in a substantial shift of physical metal from the US and Europe to countries in the Asian continent such as India and China, and this shift has accelerated as more Asians have prospered. Therefore demand for gold from India and other Asian countries has led to gold shortages in western capital markets. For decades the western central banks have been supplying gold to the market to try to stop the price rising, a strategy that was always going to eventually fail.

We have no way of knowing how much gold the American and European central banks have left, but it is a fair bet that it is less than half the 19,000 tonnes they officially claim to have as part of their monetary reserves. They are simply running out of bullion to sell to keep the price down. So it is almost certain that the Reserve Bank of India has come under pressure from western central banks to limit Indian citizens’ imports of gold.

From the Reserve Bank’s point of view, it is a waste of time telling middle-class Indians to give up saving gold, so the answer is to persuade them to invest in paper alternatives. For this strategy to work, not only must they be encouraged to buy paper gold, but they must be discouraged from taking delivery of the physical metal. And this is precisely what is happening.

The irony is that while the Indian government is encouraging the development of paper gold markets, in the West these markets are now under significant stress. Bullion banks in London and New York geared up their paper gold trading in the 1990s, and have been unable to adjust to the rapidly increasing demand from India, China and elsewhere that has absorbed much of the available gold. The combination of large quantities of paper gold and very little physical bullion to underpin it threatens a liquidity crisis, which will also engulf paper gold products elsewhere, even in India.

At GoldMoney we have been observing these developments with increasing concern, and see attempts to encourage anyone to switch to synthetic gold as a trap. As the problems in the global economy and banking system multiply we expect western governments to continue to restrict their citizens’ freedom of choice. There is an increasing likelihood of taxes on gold or even outright confiscation in Europe and North America if this trend continues. In these circumstances it is also easier for any government to tax paper gold, such as ETFs or e-gold, than to track down anonymous bullion ownership.

By substituting paper gold for physical metal, the people of India are being asked to pay the price of the follies of the western banking system. This contrasts with the attitude taken by the Chinese authorities who are not so weak that they give in to western demands. The middle-class Indian may not be financially sophisticated, but he is more than likely to see through the ETF and e-gold promises.

After all, that is why he puts his trust in gold and not government paper. Attempts to establish various forms of paper gold should therefore fail.

This article was first published at http://www.bullionbulletin.in/.

War Bird

Comments

  1. An extremely perceptive summation of the probable cause of the Indian state authorities’ efforts to squelch gold demand. Which unfortunately loses all traction in the (understandable yet still inexcusably)self-serving implication contained within the sentence -
    [t]here is an increasing likelihood of taxes on gold or even outright confiscation in Europe and North America if this trend continues. In these circumstances it is also easier for any government to tax paper gold, such as ETFs or e-gold, than to track down anonymous bullion ownership….
    insofar as giving false comfort to physical holders of precious metals that their assets are likely to remain out of the reach of the usual suspects if stored at hand, or in custody of bullion storage outfits such as GoldMoney and so on. All such comforting assumptions need be closely questioned by those intent pon maintaining their status as ‘freeman\woman’ in the coming next phase of embezzlement, fraud, and outright theft of which we have already been given fair warning, via episodic installments such as MFG. 
     
    Those who prefer to hit the snooze button and dream on of happy ever after narratives may find themselves confronting a ‘rude awakening’ before long!
    Editing that quote to [t]here is an increasing likelihood of taxes on gold or even outright confiscation in Europe and North America
    will give the required full understanding of the situation faced by goldenholders… with all the other ancillary advantages of brevity attached!

  2. Excerpt:  … Governments “are in the business of transferring wealth from savers and workers to pay for political objectives and also to assist their favoured pressure groups. As well as getting its income legally through taxation

    We here on this forum know what it is to ‘transfer wealth’. It’s stealing, in the ordinary sense. So, how do ‘judges’ preserve their ‘honor’, yet blatantly appear to defend theft? Because governments in technical truth are NOT stealing; they’re re-possessing their loan of ‘Property’ and lending it to others in their greater or more expedient favor.

    In the example above, of India, ‘rupee’ is merely a WORD in absolute truth and reality. The Indian government has taken possession of that WORD and embodied it with a claim of value. Whatever item allowed association with the WORD, be it an account book entry, symbol on a stamp, a bead or a plastic token, is merely a counting device ASSOCIATED with the government’s ‘VALUABLE PROPERTY’ … the WORD, ‘rupee! THAT’S what government takes, claims fees in, levies taxes ON, and demands those taxes to be paid IN. The ‘supply’ of rupees is infinite! The ‘amount in circulation’ is only limited by the number of minds believing that a rupee is something existing in reality rather than by sheer decree of a statute.

    With that in mind … the only control over physical things that the government has, are things ASSOCIATED WITH and VALUED IN, government’s Exclusive Intellectual Property … rupees. In the case of gold, it’s ONLY because that gold is VALUED in government’s rupees by possessors of it, that government derives ANY ‘authority’ to ‘prevent its import or distribution through Indian society. It is because, dispelling the incantation of the ‘magic WORD’ … rupee … from the essential MEANING of money, however unaware of PRECISELY what it is that they’re doing, the Indian People are emerging from their trance. An enchantment that their government very well understands, ABSOLUTELY MUST be maintained.

    This exact same sham is repeated in EVERY country upon EVERY People on our planet.

  3. ‘ Quote, “The government hates it when people get wealthy by doing nothing”
    Please tell me how my taking the fragment of left over after tax hard earned cash and income and buying gold, holding it for years or decades, enduring ceaseless ups and downs of the gold price, the worry of whether it will be stolen, confiscated, expropriated and, when I sell it, how I calculated the taxes on gains that will accrue to my profits, is nothing. It takes some seriously large stones to do this. And there are plenty of people on this site that need a NAD hammock to carry them big ones
      Give me a freaking break.
    The government hates people who get wealthy from things outside their rapacious control and that ranges from sweat of the brow labor for cash, business owners, precious metal owners and other entrepreneurial sorts who want nothing more than having the goddamn gummint off their backs.
    If the government hates it when people get wealthy by do nothing, then the freaking goverment is the antithesis of doing nothing. It is a sucking black hole of nothingness, sucking up the wealth, labor and freedom of its slaves through inflation, taxes, regulations, impounds, penalties, jails, more regulations, the weary and fatigue producing lies of gummint and with all the other crushing burdens that all governments impose on the soul and spirit of humanity.
    I wish government was nothing but in reality it is like Orwell said.  A boot smashing the face of humanity, forever

  4. Government lasts as long as people will sufer its injustices and right that which was wrong. Government and the slothful do nothing parasites that make up its numbers exist by the grace of god and the will ( or lack thereof ) of its multitudes.It is WE who give life to “governement” so by that reason its abolishment accordingly lies with us. The major obsticle WE face is the ignorance and the apathy of the masses so we few suffer for and to the detrriment of us all.  

  5. Sounds like the BIS been slappin those Indians around some.

    “That’s a nice economy you have there, it’d be a shame if somethin’ happened to it.”

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