This past May, I wrote about how Indian Prime Minister Narendra Modi asked Indians to stop buying gold altogether for a year.
The Indian government also doubled gold import taxes to 15% to curb gold buying.
Citizens of India didn’t listen. Gold purchases are up.
Indians might be remembering back to 2016, when PM Modi’s government (yeah, he’s been in charge for 12+ years) announced a “demonetization” of all 500 and 1,000 rupee notes.
For a time, Indians could convert their 500 and 1,000 rupee notes for new 500 and 2000 rupee notes – with strict per person, per day exchange limits over a 50 day window. For context, 1,000 rupees were worth about $16 in 2016. The limits were between 2,000 and 4,500 rupees per exchange.
It was a disaster. Bank lines were hours long, all to exchange what amounted to $50/day – at most. Several deaths were blamed on the crushing lines as people rushed to exchange their cash for… new cash.
The reason for this “demonetization?”
Modi said it was to curtail the shadow economy.
What it really did was cause millions of Indians to have to stand in line for hours to make sure their money didn’t expire worthless. At the end of this action, about 99% of the previous currency was converted or deposited into Indian banks.
The cost? Indian equity markets dropped 6% the day after the demonetization announcement. The country’s GDP and industrial output fell and an estimated 1.5 million jobs were lost.
Oh, and India saw a big rise in digital/cashless transactions. Turns out, Indians have smartphones too.
PM Modi is now reiterating his plea to Indians not to buy gold.
The reason? India has to import nearly all of its gold. As the world’s #2 largest gold buying country, it creates a trade deficit, which weakens the Indian Rupee. India already has to import all of its oil, which creates a massive trade deficit. Gold is the icing on the cake.
But Indians clearly don’t trust Modi or the Rupee. Why hold your money in Rupees – especially when you have a great deal of uncertainty about which notes to own? Maybe next time they’ll force you to turn in all of your paper money to be 100% cashless. Maybe the next “demonetization” will be of assets held in Indian banks?
Meanwhile, Indians know gold can preserve their wealth – no matter what happens with the Rupee.
The pretext for monetary policy is always irrelevant. If you want to screw over people who hold your currency, one excuse is as good as another. The message is clear: the central bank is not your friend. Don’t hold their paper – because they have both the will and the ability to render it worthless.
Obviously, people in the US have not experienced “demonetization” in the same explicit way the Indians did 10 years ago.
But we have seen broad debasement of the dollar. Americans experienced high inflation post Covid – and it’s hovered well above the Fed’s 2% annual target. Prices aren’t coming down.
The question that we still don’t know the answer to: what will it take for Americans to wake up to the same reality that Indians are already acutely aware of – that gold is the only safe monetary harbor, and that the central bank is going to screw you?
Without broad gold buying in the West, gold prices are high.
What happens when the West buys gold?
Best,
Garrett Goggin, CFA, CMT
Lead Analyst and Founder, Golden Portfolio
