Gold imports destroying Indian economy?

[sob]

Golden oppurtunity to open up Gold exploration in India. If the prices are so high then even the defunct Kolar Gold fields may turn profitable.

 

[panduranghari]

[video]http://www.cbsnews.com/video/watch/?id=7398482n[/video]

1.2 billion people in India. 10 million weddings each year in India. Half of the gold bought in India is jewelry for weddings. In India, a family without gold is an "incomplete family."

Indian households save about 30% of their income compared to Americans who save about 5%.

The tradition that a bride's parents will give her gold is a financial burden to some families.

Gold is so important to the lives of Indians that the poor can now get financing for it.

The World Gold Council is funded by a group of mining companies. Its representative in India created the program to help India's poor buy gold.

Q: How can you be both frugal and conservative yet be willing to spend thousands of dollars on gold?

A: When Indians buy gold, they don't think they're spending money. In their minds, that is a savings. That purchase of gold is going to your savings account. It's not an expense, it's an investment.

Indians believe the price of gold will continue rising. It is impossible to tell an Indian consumer that the price of gold will fall, because the belief that gold will continue rising is backed by its past performance.


Today India has 557.7 tonnes of official gold reserves, valued at more than $30B. Before the 2009 IMF sale it had 357.7 tonnes. India's total foreign exchange reserves now stand at $296B, ranking it 9th in the world with China at #1.

A Few Thoughts

It occurs to me that Indian savers are saving at full capacity and then some; call it the savings rate ceiling. The problem is that Indians like physical gold. You don't see much paper gold at those weddings, do you?

Gold demand is generally inelastic in currency terms because its primary use is as a wealth reserve. This is in contrast to industrial metals where demand is relatively inelastic in weight terms. In other words, gold flow by volume should be observed to decline as the price rises while gold flow by value might remain steady. Yet India's gold intake has risen from $4.1B in 2002 to $33.8B in 2011. That's an 824% rise in demand in currency terms at the same time as the price of gold in dollars rose only around 600%. And this while running a trade deficit:

India's Love of Gold

We are moving away from a paradigm where we save the excess productivity in dollars or euros or rupees.

We are moving away from US dollar being the global wealth reserve. Gold is coming back. And this gold is physical gold. Not paper Exchange traded fund, not unit trust, not gold backed currency....no paper gold. And this gold will be highly sought after by west and east.

'Hindustan hai sone ki chidiya' wasn't it Nadir Shah or Ghauri who said that?

India has more gold in public hands than the rest of the world put together. We need a strong military to prevent invasion of India like it happened in the past.

Its inevitable.

Here is a blog of my good friend who has explained the future economic paradigm;

How The West Was Lost: Freegold

 

[ejazr]

The problem is that Gold is a locked investment and can't add value to economy unless it is sold.

On the other hand if people invest their income in stocks, bonds or even just in the bank, this capital is used by companies or govt. to fuel economic expansion. Even if its in a term deposit, banks can lend it out to other companies to fuel economic expansion.

On a macro economic level, this huge import of Gold is not conducive to an efficient economic environment.

 

[p2prada]

Ah! Conspiracy theories. The remittances to India has been greater than Gold purchases. This will only increase in time. So, while Gold does create problems for the economy, if there is hoarding of Gold, there are other venues that generate wealth for India at the same time.

What we must reduce is Oil. At least with Gold, it has an extremely high resale value. Oil is a perishable commodity and this creates bigger problems than Gold.

 

[trackwhack]

There are at least two other threads on this if not more.

http://defenceforumindia.com/forum/economy-infrastructure/24739-fascination-gold-hampering-indias-growth-story.html

http://defenceforumindia.com/forum/economy-infrastructure/28657-india-imports-gold-worth-2-15-trillion-rupees.html


India must import as much gold as possible. Every dollar of remittance must be bought as gold. When the dollar loses its preeminence as the global currency, most of our savings will be in gold. Our trade imbalance will get sorted out eventually when the world moves away from carbon energy.

And the Gold standard will return.

 

[Mr.Ryu]

All the gold that is given to the new couple are not used by them daily if they did they will look like a mini jewel shop, so if govt come up with some thing like Gold reserve bank or some thing like that where govt will pay the customers with monitory benefit that would be great in no time India's gold reserve will pass rest of the world

 

[ejazr]

The Gold standard was and is bad for the economy as it restricts what Central banks can do to correct boom and busts cycles. There is almost unanimous consensus among economists around that.One of the reasons for the severity for the Great Depression was adherence to the Gold standard. So I doubt that the gold standard would make a comeback anytime soon.


But in any case, hoarding Gold by households does not help our trade imbalance in anyway. Its not like the govt. can order households to sell their Gold so that we can pay up our trade deficit. It just sits in our lockers and is given away at weddings to the brides.


Keep in mind that as panduranghari has shown, we are importing LESS volume of gold and paying much higher value for it. Almost $45Billion now as compared to our remittances of $55Billion.


Ofcourse, this doesn't mean that people should stop buying Gold. We can't legislate like that. But raising duties is one way of reducing the amount of Gold imported. Just like raising taxes on petrol and deregulating fuel prices is a way to reduce demand for oil.


Ideally we would like import as little as possible and export as much as possible. If we were to export Gold ornaments by importing raw gold ores, then that would be no problem at all.

 

[panduranghari]

The Gold standard was and is bad for the economy as it restricts what Central banks can do to correct boom and busts cycles. There is almost unanimous consensus among economists around that.One of the reasons for the severity for the Great Depression was adherence to the Gold standard. So I doubt that the gold standard would make a comeback anytime soon.
.

There will never be a gold standard again.

To implement a gold standard you need 2 things; a huge hoard of physical gold and you need to raise the price very high enough to make it feasible.

However we will encounter a problem;

If Ejazr (India) is a highly productive economy while panduranghar(USA)i is nothing but selling financial services, I need things which I import from Ejazr. I pay ejazr in fiat which I print out of thin air. I intially started by offering 1 oz gold for 20 USD. But as the balance of payment (BOP) got worse I found it very difficult to keep that peg. So I called in the gold from my body cells under the guise of confiscation. Those who did not cough up were criminalised. Within a few days I raised the exchange from 20 USD to 35 USD. Ejazr complained. I said sorry, Ejazr accepted my apologies.

This charade went on and on until it was 1971 - 15th August to be precise. President Nixon who was sitting inside my brain knew panduranghari has issued too many US dollars but there is not enough gold to back it. the BOP needed to be balanced. Charles de Gaulle sitting inside Ejazr'S HEAD kept harping how exorbitant privilege Panduranghari had that he was printing his own currency, he was accessing resources he never had. When ejazr redeemed his USD for my gold, I knew the other posters would do the same.

So when Ray, Trackwhack, Mr Ryu, sob, Armand, MadIndian started asking for gold in exchage of the token USD I said sorry. They could do nothing as there was no credible option to replace US dollar. And panduranghari also knew it. They knew since the terrible 1930's there was terrible deflation due to gold backing the currency. They did not want that. But they did not want this to continue either. They wanted to eliminate the exorbitant privilege.

With no credible replacement to trade oil in they accepted the fait-accompli. But did they?

In 1944 during the bretton woods conference, there were many smart intelligent people like Jaques Reuff. His opinion was all through the middle ages Europe fought wars and destroyed each other - the Franco-prussian war, the 1st and 2nd world war, the 100 year war, etc etc. They said the only way to prevent wars is economic integration. There were laid the seeds of Euro. The 1957 Rome accord started the ball rolling and Euro came into existence with the Maastricht treaty of 1992 as ECU and forming Euro in 1999.

Now there was a credible option for oil to trade away from USD.

Why credible?

If you read the consolidated financial statement of Eurozone the number 1 item they state is physical gold.It was required for all the countries joining the Euro to contribute financially. The contribution could be called the membership fee. This membership fee had to be 15% in physical gold as priced in US dollar on 1 January 1999.

Every country did that. This gold is re priced every 3 months and the financial statement reflects this.


When you understand how it is that it is economically (and therefore politically) undesirable for other major currencies to appreciate against their peer currencies (which is exactly what would happen to any currency replacing the dollar's reserve status), you will subsequently know why gold shall continue to emerge as the de facto solution to the international reserve question.

And here I emphasize de facto rather than de jure because this has become a global phenomenon driven by a natural evolution (survival and ascent of the fittest) and does not require any additional international treaty or enabling legislation as a prerequisite or for motivation.

The breeze is fair and the road ahead is clear for the ascent of gold.

Money is known as unit of account, mode of exchange and a store of value.

Fiat currency has made the convenience of having credit cards, debit cards, electronic money thus acting as a unit of account and a mode of exchange.

However fiat currency will never ever be a store of value ever again.

That place will be occupied by the one and only - PHYSICAL GOLD.

 

[thakur_ritesh]

It remains extremely surprising and interesting at the same time on how one starts to innovate to have a face saver, when people have created an all round and an unmanageable mess. FM, first talked about the big strain on the economy that purchase of gold creates either in the budget, or in one of the interviews post the budget, the same day, and this idea has all of a sudden kicked off in the last few months (6-9) since the economy started to do rather poorly.

It is surprising the same gold was seen as an asset not so long back.

Let us look at what the allegations are:

Widening the country's current account deficit:

Partly true, but that's about it. The biggest strain comes in the form of crude purchase, and it is here that there is huge disparity that gets created. I have said this before, and will repeat, pull up your socks, and get your act together with the countries from whom we buy oil/gas/coal. There is a big trade imbalance, do what is being done with iran now, with all these countries. Your exports will see a spike of at least 50 usd immediately. We are the economy of the future and we hold a lot of aces on this front.

In the article the author is looking at an adjustment of 21b usd, the question remains, what is the trade imbalance with countries from whom we buy gold? If it is negative for us, is reduction of imports from them or increase of exports to them an answer.

Unfortunately the author is looking at a solution which suggests reduction of imports, and that remains a typical bureaucratic way of dealing with issues at hand. Reason why each time we are confronted with inflation, RBI is forced to slow down the pace of the economy, than the GoI take long term measures to address supply constraints. The license raj mentality still persists.

Weakening the rupee:

Seriously this is the most lame of the excuses. Someone has really not cared to check the actual reasons why the rupee depreciated from 45 to 54. At best, this accusation has very little truth in it, but then that should go for every dollar spent on imports, so why just point fingers at gold.

Generally keeping money that could flow into the economy locked up in cupboards and jewellery boxes.

I have made a point on this earlier, will repeat. This is a one time loss at the time of import. Once the gold is bought by the end consumer, the money has exchanged hands, the money is in the economy, exchanging hands continuously and is giving a continuous growth to the economy, along with that there is asset creation.

 

[KS]

What's the use of men debating this topic when the average Indian women will still go to the jewellery shop at the first given opportunity ?

In the psyche of the Indians, gold = investment, a leg to stand on if something goes wrong in the future.

 

[pmaitra]

The problem is that Gold is a locked investment and can't add value to economy unless it is sold.

Interesting view.

It's true that gold is locked investment, and doesn't add value tot he economy. However, it is better to hold gold than hold currency, because, gold will hold its value, with minor fluctuations, even after 100 years, but currency will definitely go downhill.

What we need to realise is that many actually trust gold over currency.

 

[Mad Indian]

@MadIndian

The article is by Financial Times based in the UK quoting a Macquarie Bank report which is based in Australia. How did the GoI get involved in this? You should really read the article through before making comments and comprehend what is being said.

Gold and Oil are our biggest import costs. While Oil is a necessity because of the nature of the commodity and contributes the economy as it is consumed, we could certainly do with less Gold imports in the sense that consumers who just buy and gold and keep in their lockers are driving up the current account deficit. It doesn't add any value to the economy as such and is just locked capital that sits away doing nothing.

No other country in the world buys Gold in such large amounts as we do.And remember we are now buying Gold and record high prices. If we have a gold crash, there would serious detrioration in wealth for most people who brought Gold at such high prices.

Instead of allocating our money into Gold at such a large extent, it would have been better if this capital was allocated in say infrastructure bonds or stocks or other investments in the Indian economy.

What the GoI should be doing is taming the demand in the Gold sector by various means as well as maybe launching some sort of education campaigns on the necessity for people to diversify their holdings. At the same making sure that it doesn't make Gold smuggling profitable either.


Equities may gain if government tames demand for gold - Money Matters - livemint.com

You should understand What i meant before judging me. I meant that the fiscal mess and other non sense is due to incompetent govt and bureacracy and not Gold or Oil Imports.

Am i wrong?

 

[Mad Indian]

Interesting view.

It's true that gold is locked investment, and doesn't add value tot he economy. However, it is better to hold gold than hold currency, because, gold will hold its value, with minor fluctuations, even after 100 years, but currency will definitely go downhill.

What we need to realise is that many actually trust gold over currency.

Come on PMaitra, not you too.. What about the jobs and services it generates?

Add to that the fact that gold is used for mortgaging and for generating money in times of distress. Its not a locked investment. unless it is in the hands of Ultra rich, which again will be locked investments if the Investing place is not favourable- that is incompetant govt and bureaucracy.

 

[parijataka]

Gold is a good investment - Chinese are also buying up gold, of course they do not have a current a/c deficit unlike India. One of my colleagues relative, a school teacher one of whose assets was the ancestral house in which they lived in, discovered some gold ornaments hidden in the walls while renovating the house. They quietly melted and sold the gold [reporting the presence would have meant confiscation by govt babus]; it was a windfall for the family from their ancestors that was very poor otherwise.

Govt should consider putting some controls on import of gold. In the days of License Raj, imports were set off against an equal amount of export - this rule was later relaxed.

 

[Mad Indian]

Govt should consider putting some controls on import of gold. In the days of License Raj, imports were set off against an equal amount of export - this rule was later relaxed.

Please get out of the Nehruvian Mindset. You want something followed in the License raj after saying it yourself that Gold is a good investment?:shocked:

 

[panduranghari]

I have made a point on this earlier, will repeat. This is a one time loss at the time of import. Once the gold is bought by the end consumer, the money has exchanged hands, the money is in the economy, exchanging hands continuously and is giving a continuous growth to the economy, along with that there is asset creation.

Unfortunately the Keynesian economists who occupy top posts in the central banks around the world do not get that. Even worse the man who is revered as a sage of omaha does not get it either. These guys have vested interest in keeping the current charade going.

 

[panduranghari]

Interesting view.

It's true that gold is locked investment, and doesn't add value tot he economy. However, it is better to hold gold than hold currency, because, gold will hold its value, with minor fluctuations, even after 100 years, but currency will definitely go downhill.

What we need to realise is that many actually trust gold over currency.

And my good friend that is where we are going to. The whole world not just Indians. The current dollar experiment is about the have its final curtain call.