Why India is Buying Gold

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India is looking to shoot the messenger. It wants to ban the sale of gold coins via the banking system. India’s currency, the rupee, is falling fast against the US dollar and a range of other currencies. As a result, Indians buy gold to protect themselves against the falling rupee.

The US Dollar Rising Against Indian Rupee

The US Dollar Rising Against Indian Rupee

Source: Sober look


This increases India’s imports, which worsens its current account deficit and puts more pressure on the currency. So the Indian government, in their wisdom, look to remedy the situation by trying to discourage gold imports. Genius.

India’s problem is that it’s no longer the ‘hot’ economy it was just a few years ago. The ‘emerging markets‘ are now emerging slower than many had hoped. The two big ones, India and China, are not emerging much at all. The hot money that previously flowed into these economies is now lukewarm at best.

So the Indian rupee is under pressure, and apparently it’s gold’s fault.

The interesting thing about this is that India’s private stash of gold is massive. According to the World Gold Council, its citizens hold around 18,000 tonnes of gold. At a US$1,600 gold price, that equates to around US$1 trillion dollars.

That’s not US$1 trillion of debt based money. It’s unencumbered wealth. But because it sits outside the banking system and out of the reaches of the morons who run the country, the gold has no bearing on India’s economy or currency.

There’s no doubt Indians would be better off investing that US$1 trillion in gold into productive enterprises, but the country doesn’t have the political infrastructure that allows capital to flourish.

We know little about India’s economy or political system, but we do know its corruption and bureaucracy are legendary. If you’re an average Indian with surplus savings, and you know how India operates, what would you do with the savings?

You follow 5,000 years (give or take a decade) of tradition, and accumulate your wealth in gold. You know bureaucracy and corruption can’t touch your gold. You know it will retain its value for you and your children, should they ever need it.

Over the centuries, this mentality has turned the Indian population into the largest gold holders in the world. They hold tremendous wealth. They just don’t have the infrastructure to harness it.

This provides important insights into where the western world might be heading.

The West has tremendous wealth, but it’s all denominated in debt. As government involvement in the economy continues, and as corruption becomes more and more endemic, individuals will increasingly choose to take a portion of their wealth out of the system and preserve it in gold.

That’s why the gold bull market is 11 years old and counting. It reflects the slow but unrelenting change in Western people’s minds about how the financial world works卆bout the evolution of wealth and power.

Take this quote from Richard Duncan’s new book, The New Depression: the Breakdown of the Paper Money Economy:

‘The hard truth is that it is not easy to preserve wealth. If it were, the families who were wealthy 200 years ago would still be wealthy today – and generally, they are not. In the very harsh economic environment that is likely to prevail over the next ten year, it is likely that a great deal of wealth is going to be destroyed.’

Self-preservation and survival is a key human characteristic. Above all else, we want to survive. That counts for financial survival as well. Gold is, and will be, the way to survive this slow and rolling crisis with your wealth intact.

But Western minds have a hard time thinking this way. Gold is for crazies and the paranoid. In that case, there are a lot of nut jobs in India?and they have US$1 trillion to show for it.

Before you think we’ve gone all eastern and zen-like on you, let’s get back to some thoroughly western action…trading!

With the ASX200 hovering around crucial support levels, we asked Slipstream Trader Murray Dawes for his take on the short term outlook. Murray reckons we might ‘see some buying support next week due to the end of tax loss selling pressure, but the outcome of the European summit will be the catalyst for future direction. The market is expecting disappointment, so if there is a big announcement a bounce may be imminent.’

But he’s still bearish on the primary direction of the market. He sees the market in a ‘tug-of-war’ around the key support level of 4075 on the ASX200.

‘How long this tussle carries on for I don’t know but it has lasted for about a month now. Last year when we were faced with a similar technical set up the market took six weeks of to and fro before finally succumbing to the selling pressure and falling 15% in a week.’

Murray says that, if the 4075 level can’t hold, we’ll quickly find ourselves trading around 3850.

We’ll explore that likelihood tomorrow.

Regards,

Greg Canavan
for The Daily Reckoning Australia

From the Archives…

The US Deficit of Deceit
2012-06-22 – Greg Canavan

How Nice to Have Friends At the Fed
2012-06-21 – Bill Bonner

Deep in the Stock Market Trenches
2012-06-20 – Murray Dawes

In Praise of the Eureka Rebellion
2012-06-19 – Dan Denning

What Could Possibly Go Wrong With Infrastructure Investment Bonds?
2012-06-18 – Dan Denning

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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10 Comments on "Why India is Buying Gold"

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Ross
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Legendary corrupt governments are everywhere …

http://mumbrella.com.au/do-you-ever-think-youre-incompetent-100261

imagine a creepy left-imperialist publicly funded wastrel BBC giving their government a dressing down on fiscal policy

Gul
Guest
The figure of 18000 tonnes of Gold with Indians is disputed… by some accounts it is closer to 30000 tonnes… refer to this comment.. … “The total Gold in the world above ground is estimated to be about 165000 tons as on 2010 ((2009 by this; http://en.wikipedia.org/wiki/Gold_reserve ). Taking the production figure of 36000 tons out from 1996 to 2010 gives a balance of approx. 130000 tons in 1996. Twenty percent of this gives 26000 tons. Fifteen percent gives about 19500 tons. Taking an average gives us 22750 tons. Adding 8250 tons reported by TOI from 1996 to 2010 gives… Read more »
Earl Mardle
Guest
India’s gold wealth is worth $1T only as long as there are people willing and able to exchange $1T for it. So where, exasctly, do you bel;ikeve that this $1T will come from to buy all of India’s gold? Or even a significant proportion of it? If we are all going broke together, who is the customer? Wealth that can’t be exchanged for useful things like food, clothes, medicines, housing or energy is nothing. The day they really need it, so will many, many, many others. The day they all start trying to sell their gold on the open market… Read more »
Ross
Guest
@Earl, you’ve walked into a problematic place there. My objection to gold is that its market pricing is not risk free and anything at all from paper instrument to commodity or any b/s thing called “money” being declared risk free is certain to become a dodgy bubble asset. Like you say it is also an issue of how to turn gold into food without intermediary currency. As I say above governments can also control gold price too easily because of its physicality. In the 60’s the governments set the price to producers. FDR issued executive order 6102. Governments can lie… Read more »
Gul
Guest
The problem wtih people like Earl is that they are not only not willing to think outside the “western” definitions of money that have existed for the past 40 years or so but are also ignorant of the the way the gold market works in India. In almost all the streets of all the cities and towns and almost all the village centres in India there are jewellers (who are also money lender/exchangers) who against the morgage of gold or silver will extend a loan at a reasonable rate of interest. This is what makes the economy of India so… Read more »
fairguy
Guest

Great comments, Gul.

Ed_B
Guest

I can well understand anyone wanting to trade rupees for gold but why would anyone want to give up their gold for rupees? Daily spending money? Maybe. If so, it better be VERY short-term.

Silver bull
Guest
great one gul. Well said ! this is quit interest artical to read. And have to wait to see how India play out. Definitely, the one who own gold and silver has the abilities to trade world wide will the debt bonds dependence economy either cant buy anymore bonds or printing money cant buy you anything on the street. Which finally people would need physical stuff to trade. From just reading Gul’s comment, it seems like India is way way ahead of what can happen in the future when paper money final die out. It seems they already have a… Read more »
Gul
Guest
Thanks @Silver bull and @fairguy for your comments! Well actually to really understand the power behind India’s gold reserves read this here…http://2ndlook.wordpress.com/2007/11/10/india-the-worlds-richest-economy/ As you will see even a poor Indian family has a minimum of 5 grams of gold. At current prices of Rs.2800 per gm that is about Rs.14000. This is enough for a poor Indian family to feed itself for about 4-6 months or maybe even more. This is the crux of the issue.In an emergency with gold being the only “money” that will be execpted anywhere – atleast till such time the government reforms and brings out… Read more »
Tim Put
Guest

Gul – I am a 2ndlooker. The way you have explained 2ndlook’s ideas are awesome.

The other aspect that your comment brings to my mind is how 2ndlook traced the Rise of Mafia and global crime tsunami because gold imports were made illegal in India.

http://2ndlook.wordpress.com/2008/12/13/the-greatest-crime-wave-ever/

Governments may decide to make gold illegal again – according to 2ndlook, after Obama’s re-election.

Before the crime wave engulfs India, it will make Mafia the rulers of the West!

PS – Gul! 2ndlook was so happy with your comment that he has decided to retire and go to Benares! He says his work is done.

wpDiscuz
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