India’s newest gold monetization scheme has been a colossal failure. After one month, it has netted only one kilogram (2.2 pounds avoirdupois) out of an estimated 20,000 tonnes (44 million pounds avdp) of privately-held gold. Why is that? Well, let’s look at how the program works.
- Gold-holders turn their gold over to a bank. The banks melt the metal down and provide it to the central bank to loan to jewellers.
- In exchange, the central bank provides gold accounts to the banks on behalf of the gold depositors and pays interest on those deposits.
- The interest rate on those deposits is a little over 2%, while the inflation rate in India right now is over 5%.
- The deposits are time deposits, meaning that depositors receive their principal repaid at the end of the term; short-term depositors receive gold or rupees back, while medium- and long-term depositors receive only rupees.
So you give up all your gold, get at most a -3% rate of return on your investment, and might get both your interest payments and principal paid in rupees that the government has historically devalued at up to 15% per year. And the government wonders why gold-holders aren’t flocking to offload their gold?
But not to worry, the government will make sure this scheme works:
“A finance ministry official said if banks fail to win over temples, the government could intervene directly as it is looking for a big boost to the scheme to keep both imports and the current account deficit under control.”
Shades of 1933 all over again. One would imagine that outright gold confiscation from Hindu temples would result in massive protests and quite a bit of bloodshed. And while most rational people would assume that the government would be smart enough to avoid doing something so drastically stupid, this is the same government that developed the cockamamie gold monetization scheme in the first place. Never underestimate the idiocy of government bureaucrats, especially when those bureaucrats are trying to save face.
Let’s hope for the sake of the Indian people that their government learns its lesson and quietly shelves its futile attempts to monetize private gold holdings. If it really wanted to monetize gold, it would end any restrictions on the importation, transfer, and use of gold as money and allow markets to determine what money they wanted to use. Control is hard to give up, but the Indian economy would be far better off with gold as money instead of rupees.