Why India Is Buying Gold
Greg CanavanIndia 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
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 around the evolution of wealth and power.
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