Two weeks ago, with its current account getting crushed by relentless gold imports, India’s finance minister Chidambaram literally begged the people to stop buying gold. Judging by the popular response, the ongoing physical shortage, and last night’s increase in Indian gold import duties from 6% to 8%, appealing to people’s feeling when it comes to the choice of fiat vs physical, has failed miserably. So the FinMin Chidambaram has decided to escalate. Per Reuters: “The Reserve Bank of India has advised banks against selling gold coins to retail customers, Finance Minister P. Chidambaram said on Thursday, a day after he raised gold import duty to try to ease pressure on India’s bloated current account deficit.” Well, if there ever was one sure way to send demand for any product through the roof (guns, ammo, etc), it is for the government to prohibit its outright sale. What follows next, almost without fail, is a panicked, chaotic buying scramble.
Gold imports by India, the world’s biggest buyer of bullion, surged to 162 tonnes in May — more than twice the monthly average in the record
year of 2011.
“I think the Reserve Bank has advised banks that they should not sell gold coins,” said Chidambaram, while speaking at an event in Mumbai.
Chidambaram also urged banks to advise their customers not to invest in gold.
Why? If it is not clear by now, here is the explanation: there is simply not enough gold to satisfy demand at the current artificially downward-manipulated price, no matter what propaganda script is being spun on Verizon TV at any given moment. And with India’s idiotic decree, even more gold will be purchased at these prices.
The government has always seen taking autocratic decisions. It fails to understand that decisions involving investments depends on the individuals perception of risk and the returns it can generate. In the past decade only two asset classes have performed well viz real estate and gold. Real estate, mainly due to politicians direct/indirect support to the builder lobby which has artificially jacked up prices amid severe slowdown in the broader economy. The increase in size of parallel economy has resulted in the non controllable rise in inflationary pressures in the economy there by increasing demand for the yellow metal. Whatever happens to the global economy, Indian’s quest for gold will always remain high, especially when inflationary pressures are sky high. Whatever numbers government come out with w.r.t WPI or CPI inflation, common man at the low level is struggling to meet their ends. The common man is thoroughly understood that investment in Indian Equities is not a common man’s cup of tea as prices are manipulated and rigged. Neither the economy is seen moving up and the impending elections next year will keep stock market indices under check. The only profitable option available with retail investor is to invest in gold.
Post sub prime crisis it was the huge investments by the government in gold which gave confidence to the retail investors to invest in the asset class. Now when it has backfired, government is forcing investors to stop investing in the asset class
Instead government should take steps to promote and develop other asset classes to provide profitable investment options to the investors
Thanks a lot Mehul for your exhaustive perpective.