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India’s Failing Gold Monetization Scheme: Seizure Imminent?
India’s Failing Gold Monetization Scheme: Seizure Imminent?
- 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.
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Indians Urged To Give Up Their “Idle Gold” For The Good Of The Nation
Indians Urged To Give Up Their “Idle Gold” For The Good Of The Nation
One month ago, when reviewing India’s ploy to monetize the thousands of tons of gold held by the broader population through the issuance of “gold-backed bonds” (which would need to offer a rate of interest greater than inflation to be attractive but they won’t), we asked if this is “the start of India’s gold confiscation.”
As a reminder, as part of the plan, Indians would be allowed to “deposit their jewelry or bars with banks and earn interest, while the banks will be free to sell the gold to jewelers, thereby boosting supply. The deposits can be for a period of one year to 15 years with the interest on short-term commitments to be decided by the banks and those on long-term deposits by the government in consultation with the central bank.”
The sovereign gold bonds are aimed at people buying the precious metal as an investment. The securities may help shift a part of the estimated 300 metric tons a year investment demand, the government said in a separate statement. The bonds will be issued in denominations of 5 grams, 10 grams, 50 grams and 100 grams for a term of five years to seven years with a rate of interest to be calculated on the value of the metal at the time of investment, it said.
When stripped of its pompous rhetoric, what India is offering is simple: a gold-for-paper exchange, which however in a culture where gold has been the definition of money for centuries, would likely be a non-starter from the beginning. One look at the chart below showing Indian gold demands is sufficient to show just how ingrained in the Indian psyche gold hasbecome.
However, as we said a month ago, just because it is doomed from the beginning, at least in its current iteration, does not mean it won’t be tried (see: Abenomics)… or adjusted. Because this proposal was nothing short of the initial shot across the gold confiscation bow. Here is what else we said:
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