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How A New Gold Policy Could Save The Economy Of India
India has always been a mysterious yet magical place for every investor in gold. There is an obvious love-hate relationship where consumers love gold, but as a lot of gold gets imported into India, an account deficit is created which is something the government doesn’t really like. That’s also the main reason why the Indian government has always tried to reduce the demand for gold even though it’s a major monetary asset and every country would be happy with its population buying gold for different reasons than distrusting the country’s currency.
The problem is obviously that the government’s official policy to curb the imports of gold is incredibly inefficient. The Indians love gold and will try to get their hands on the yellow shiny stuff no matter what. By limiting the amounts of officially imported gold, the government is actually indirectly encouraging smuggling as Indians don’t seem to be holding back on buying gold despite the official regulations.
A new regulatory framework could be very interesting for the country and its citizens as some kind of middle ground will need to be found to keep both parts of the equation happy. In a survey whereby 5,000 Indians were asked about their opinion about gold, a big majority answered that they would continue to buy gold, in good times and in bad times so an import restriction isn’t really having a deterring effect. Moreover, in the era when the government policy was quite loose, it actually benefited the most as the import duties brought in more cash.
As India is a country with a dramatic difference between the demand for gold and the domestic production of gold (see previous image), something will need to happen and that will have to happen sooner rather than later. According to the World Gold Council the solution isn’t to restrict the import of gold even further, but to find a way to use the gold more efficiently in the country’s economy. For instance, several of the 5,000 respondents in the survey have indicated that if their bank would pay interest if they would deposit their gold, they would seriously consider to do so. But that can’t really happen as long as banks aren’t allowed to count their gold as a part of their liquidity reserves, and this also immediately closes the door for Indian banks to create new gold-derivative products, such as gold-backed bonds or other gold-backed investment securities.
Gold won’t really be abandoned by Indian households neither. In its survey, the World Gold Council asked what the respondent’s reaction would be if the gold price would go up and the results are astonishing. As you can see on the next chart, the majority would either do nothing or buy even more gold, and only a tiny fraction (6.4%) would consider selling gold.
Would the effect of bringing gold inside the financial system have a big effect? Absolutely. The most recent estimates are guesstimating that the total value of gold in the Indian economy is not less than 1 trillion dollars. This basically means that the majority of the Indian’s net worth is invested in gold (and granted, rich Indians will obviously have much more gold which will skew the ratio a bit). If only 10% of the gold would be used in the financial system, the 100 billion dollar windfall could have huge implications for both the economy and the government revenues. The best way to realize this, is if banks would be allowed to let their clients deposit gold and be able to draw down cash, backed by their gold in the banks’ safe. This would increase the available purchasing power to the average Indian consumer thus increasing the consumption rate and fueling the entire GDP of the country.
One final chart will impress you. The total value of the gold in India is estimated to be around $1T, as experts are estimating Indian households to own in excess of 700 million ounces. The total GDP of the country is ‘just’ $1.9T. If only 10% of the gold would be used to increase consumer spending, the effect on the country’s GDP would be enormous.
By effectively limiting the free trade in gold, the Indian government is also limiting the economic growth of the country. We’d dare to go even a bit further than the World Gold Council and think that the gold policy could be changed and used by the Indian government to regulate a certain and consistent GDP growth. In tough times the government could ease the regulatory hurdles for gold to fuel the domestic consumption, whilst in prosperous times where the economy is buoyant, the gold trades could become more restricted.
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THIS ARTICLE IS FULL OF WHACK.
FIRST WHY WOULD SAVERS (IE THEY ARE USING GOLD TO SAVE) START SPENDING THEIR SAVINGS?
They wouldn't. Just because a bank would allow them to borrow? I suspect many can already do that.
Second... gold in a bank to facilitate gold fractional reserve lending is what it sounds like the article is pushing...horrible idea for gold holders...If I lend my gold I have doubled the amount of 'gold' available on the market. First there is the physical that still exists and then there is the 'gold' I have in the form of a note 'backed by gold'. This is not good as it decreases the value of gold. Gold is a wealth asset. It should not be lent, that is what currency is for. Gold will function best as the wealth asset it is when current gold fractional reserve banking ends. (It will end when the paper gold has a run and physical cannot be supplied) or when the major holders of gold demand allocated because the lose trust in their unallocated....and that could happen quickly.
I think the reason people (the gubmint that is) do hate it is because there are probably lots of backdoor deals whereby they avoid the tax man. Keep stackin' Mr Goldshirt!!!
Oh, I see...so the Indian people are not only supposed to entrust their physical gold to the banks, they're also supposed to borrow against that gold and then spend that money on "stuff" so that the Indian economy can improve? LOL...the shysters and the moneychangers never sleep, do they?
The only way out is for all economies to be pegged to gold. The "petroleum standard" is in the process of being extinguished.
Yes, there is enough gold, if you revalue it in currency terms.
Let the past be past and let's move forward the right way.
Either this can be done peacefully, or there will be a war, and then it will happen under far more onerous terms for everyone.
In any case it's coming.
How exactly would you suggest enforcing that? Some global trade organization making it illegal to trade with countries who don't cooperate?
American gold supply exceeds its demand ? Do they still have any gold of their own ?
Liquid assets at their finest. The people love gold jewelry, I know an Indian immigrant and he swears by the stuff and I agree with him.
Indians and their gold a must see: https://www.youtube.com/watch?v=sUr2E4dfs0Y
Banks to Indian people: "Trust us. If you give us your family's wealth, WE will THEN be able to help YOU." :-)
The US has 335 tons of gold? In all the households and coin shops and at the FED. Really? How would one ever know such a number? I don't think the gold held as jewlery should be considered as part of a nations wealth. You could come and go and the number would change. Only the gold held by the soverign should be considered and it should be viewable at any time by the citizens. Then there would be the beginning of a transparent system that includes gold.
Want to bet that London et al are salivating at the prospect of gettign their hands on all that physical in India?
There's a REASON for NOT trusting banks to hold your gold.... it tends to get 'lent out' - with ot without your permission
a surreptious gold standard. although it reminds me somewhat of the american housing refinance ATM, which is a reverse mortgage policy for the under 55 demographic. for the individual it raises the question, what happens after you've spent your equity, then what? what happened in america was the healthcare ripoff system, people weren't using the money for discretionary, they were paying for heart attacks and cancer operations. (a good friend is now nearly broke was worth half million ten years ago, but wo HC and two heart attacks later) HC in India is still in its nascent stages, its all tied together somehow. i suppose that a transaction only currency would do the same thing because after all, if you rehypothectate your own gold, what are you going to do with the money, bury it in your back yard? the policy suggests this, and all currencies are merely translators of value, they have no intrinsic worth. but this is easier
Yes. I think what is actually being proposed might work something like this: Indian families give their gold to the banks. Banks then have gold reserves. Banks then, pursuant to fractional-banking, issue many times as much electronic currency (loans) as they have gold reserves. International bankers buy up the loans. International bankers invest in India for a while to give India a short-term boom. Then, but not too many years later, one way or another, India has a recession. International bankers seize the gold. In what "third world country" HASN'T something like this already been done? The only thing unique about India is that its people have thousands of years of cultural memory of not trusting bankers, and therefore, in India, owning gold, in the family, remains a strong part of their culture.
It would not be hard to come up with a scheme that works - how about this:
When you import an ounce of gold you have to buy a gold certificate at 5% of the value of the gold.
When you sell the ounce of gold you transfer the certificate with the gold at no charge (legal requirement). And when the new owner sells the gold on he or she has to do the same.
But if there is no gold certificate available when the gold is sold then a new one must be bought, at the same 5%, no penalty. Gold certificates are legal to buy and sell and exchange (one ten ounce for ten one ounces etc).
5% is low enough to make small scale smuggling not worthwhile and big enough to impose draconian penalites on dealers who smuggle tonnes of the stuff. Any dealer caught not holding enough certificates or selling without a certificate gets a stiff fine. You don'thave to have a certificate to own gold, only to sell it. And you can buy and sell certificates without the gold that goes with them.