Why the Indian Government’s War on Gold will Fail

Prime Minister’s Economic Advisory Council (PMEAC) Chief C Rangarajan has declared that India’s love affair with must be contained. Gold imports must be substantially reduced from 1,000 tonnes a year to 700 tonnes.

The imperative to contain gold import has become urgent. The recent surge in gold demand is however creating some distortions and need to be rolled back to boost growth by reversing the trend of declining financial savings and keeping CAD* within prudent limit by contain gold demand.

*CAD-Current Account Deficit

India’s government has essentially placed the burden of the Indian economy on gold. And in doing so, they justify the reinforced holistic campaign against the precious metal.

Coincidentally, India’s stepped up war on gold comes amidst the ongoing Wall Street incited crash.

The Mineweb’s Shivom Seth wonderfully explains how the campaign against gold by India’s government is being orchestrated through various fronts. 

First India’s government proposes to provide an inflation hedge alternative: government inflation indexed bonds (bold mine)

It could have posed as a model scheme to curtail gold imports. In order to stifle India’s appetite for gold, the government has introduced inflation index bonds. The first tranche amounting to around $364 million (R20 billion) is to be introduced on June 4.

Inflation Indexed Bonds (IIBs) are a new category of debt instruments to be introduced in India, where the coupon and principal amount would be linked to the rate of wholesale price inflation with a lag of four months. The authorities have said the objective of introducing such bonds is to channelise savings into productive sources of instruments from unproductive ones like gold.

Slowly but surely, there seems to be an anti-gold campaign that is at play in India. The concerted effort by the Indian government to discredit gold by imposing several curbs, and channelise consumers away from the precious metal, indicates a desperation that has not gone unnoticed by savvy investors.

“The government is making it too expensive for retailers to sell gold, especially when prices have hit new all-time lows. Retailers are forced to apply hefty mark-up given the new curbs,” said Manohar Kedia, of Kedia Jewellery House.

Government inflation indexed bonds are being forced upon the average Indians, as the Indian government’s onslaught to curb the gold trade has intensified. 

India’s war on gold now covers higher taxes or tariffs and import bans and limits.

Knowing fully well that Indians cannot keep away from gold for long, the Reserve Bank of India first hauled up banks for selling gold coins, then came down hard on gold retailers and bullion houses. Now, they have turned their attention on investors, urging them to invest in debt instruments.

Further, in order to moderate the demand for gold for domestic use, the government has also restricted the import of gold on a consignment basis. A major bullion retailer in Mumbai said this would prove to be a major hurdle for exporters.

For, only those exporting gold jewellery will first have to impose on banks for each consignment, given that banks will henceforth be allowed to import gold only to meet the genuine needs of exporters of gold jewellery.

The Indian government's genuine but unstated objective have been to capture or corral people’s savings, by diverting them into the government regulated or controlled banking system, and use such savings to finance a chronically insatiable and profligate government.

India's "declining financial savings" has hardly been because of gold but because of rapacious government spending.

India’s government has more than doubled the rate of spending over the past 9 years. Such spending binge has exploded the the government’s budget deficits since 2009. (charts from tradingeconomics.com)

The intensive growth in food subsidies has been part of the such spending spree, as shown by the chart above from the Reuters. Food subsidies are expected to swell by about 40% in 2014.

The Indian government has been subsidizing many industries. Subsidies according to Wikipedia accounts for 14% of the the Indian economy in 2015 (note: not government budget). 

Yet subsidies has led to huge losses: as much as 39% of subsidized kerosene has been  stolen, and as I pointed out last year, politicians looted food subsidies to the tune of $14.5 billion!

Aside from food subsidies, the Indian government has joined the global bandwagon of stimulating the economy nearly a year ago or in June 2012, with various forms of fiscal spending mostly in infrastructure. Thus the spending ratios should be more today

Such lavish spending has resulted to expanding the debt.

Even as debt to GDP has been shrinking, the Indian government’s external debt has massively ballooned over the same period. 

This only means that the accrued government spending has been funded by debt acquired from external sources.

Again the debt to gdp metric is hardly a reliable statistical indicator because the denominator (GDP) can be driven by a credit boom and not by real growth. This is currently the case with India. India’s domestic credit to private sector has reached the highest level ever at 50.6% in 2011. India has an ongoing bubble.

While India’s foreign reserves remain near record highs, exploding fiscal deficits and ballooning external debt has led to sustained weakness in her currency, the Indian rupee.

In short, the frantic Indian government has been passing the blame on gold on what truly has been a problem of political greed via fiscal intemperance.

Importantly, the Indian government’s attack on gold represents a duplicitous move. 

While the government wants access on the private sector’s savings via the banking system (which aside from funding governments will incur various taxes and fees), the desire to reduce the public’s gold holdings by holding paper money, the rupee, means governments would also impose “the inflation tax”. 

So bank depositors will be hit by low interest rate, inflation tax, various fees and will be forced to hold and finance government debt, in favor of the government (who may default).  

One can’t rely on statistical inflation figures to accurately represent real conditions. Statistics are likely to be manipulated for the purposes of financial repression or government plunder of private sector resources. Thus, much of the average Indians will unlikely fall for such 'inflation indexed bonds' subterfuge.

So like anywhere else, governments have been resorting to direct and indirect confiscations with increasing frequency and intensity. 

Signs of boom days eh?

More entwined reasons why India’s war on gold will fail.

Gold has both cultural and monetary essence to the average Indians.

As the Deccan Gold Mines enunciates: (bold mine)

Over centuries and millennia, gold has become an inseparable part of the Indian society and fused into the psyche of the Indian. Having passed through fire in its process of evolution it is seen as a symbol of purity, the seed of Agni, the God of fire. Perhaps this is why it is a must at every religious function in India. Gold has acted as the common medium of exchange or the store of value across different dynasties in India spanning thousands of years and countless wars. Thus wealth could be preserved inspite of wars and political turbulence. For centuries, gold has been a prime means of saving in rural India.

Next as related to the cultural-religious context, India’s history has been littered with economic crises and even currency problems

To account for a recent history here is Wikipedia

Since 1950, India ran into trade deficits that increased in magnitude in the 1960s. The Government of India had a budget deficit problem and therefore could not borrow money from abroad or from the private sector, which itself had a negative savings rate. As a result, the government issued bonds to the RBI, which increased the money supply, leading to inflation. In 1966, foreign aid, which was hitherto a key factor in preventing devaluation of the rupee was finally cut off and India was told it had to liberalise its restrictions on trade before foreign aid would again materialise. The response was the politically unpopular step of devaluation accompanied by liberalisation. The Indo-Pakistani War of 1965 led the US and other countries friendly towards Pakistan to withdraw foreign aid to India, which further necessitated devaluation. Defence spending in 1965/1966 was 24.06% of total expenditure, the highest in the period from 1965 to 1989. This, accompanied by the drought of 1965/1966, led to a severe devaluation of the rupee. Current GDP per capita grew 33% in the Sixties reaching a peak growth of 142% in the Seventies, decelerating sharply back to 41% in the Eighties and 20% in the Nineties.

Aside from the rupee chart above, the following table shows how the rupee slumped relative to the US dollar from a conversion rate of 4.79 rupee/US in 1950 to 45.83 rupee/US in 2010.

One would also notice that from a base point of zero in 1975, inflation surged to 126 in 2010. And despite the plummeting rupee, through 1975 per capita income as % of the US has gyrated from 1.5% to 2.18%. This means that whatever growth India has posted over the years has failed to keep at the rate of the growth in the US. 

In short, devaluation has not solved what has been a problem of politicized economy.

This brings to fore the lessons from the great Austrian economist Ludwig von Mises

The economic backwardness of such countries as India consists precisely in the fact that their policies hinder both the accumulation of domestic capital and the investment of foreign capital. As the capital required is lacking, the Indian enterprises are prevented from employing sufficient quantities of modem equipment, are therefore producing much less per man-hour, and can only afford to pay wage rates which, compared with American wage rates, appear as shockingly low.

There is only one way that leads to an improvement of the standard of living for the wage-earning masses — the increase in the amount of capital invested. All other methods, however popular they may be, are not only futile, but are actually detrimental to the well-being of those they allegedly want to benefit.

What India requires is not to regulate or prohibit gold but to further liberalize or depoliticize the economy. 

Unfortunately politics is about smoke and mirrors rather than the upliftment of the general welfare

Another huge reason such campaign will fail is due to the informal economy. 

The informal economy means low banking penetration levels.

From DNB.com.in

With regard to financial access and penetration, India ranks low when compared with the OECD countries. India offered 6.33 branches per 100,000 persons whereas OECD countries provided for 23-45 branches per 100,000 people in 2009. For India, the number of branches and ATMs per 100,000 persons has increased to 7.13 and 5.07 in 2010.

In India, the penetration of banking services is very low. Merely, 57% of population has access to a bank account (savings) and 13% of population has debit cards and 2% has credit cards. This represents the unmet demand and the scope for expansion for the banks in India.

And prohibition of gold and offering inflation indexed bonds as alternative will hardly improve on banking penetration levels hobbled by overregulation.

And because of intensive politicization of the Indian economy, a significant segment of India’s growth has been in the informal economy

From Businessworld/Bloomberg: (bold mine)

The size of India’s “informal” economy, meanwhile, handicaps efforts to track the number of Indians who are gainfully employed. Four out of five urban workers—who collectively produce an estimated three-quarters of the country’s output—are informally employed. That means their work does not show up in official figures on productivity, innovation, social mobility and other standard metrics of progress. It’s possible to debunk some of the myths about India’s work force—three-quarters of self-employed workers in urban areas, for example, are in single-person businesses or family enterprises without hired labor, rather than upwardly mobile entrepreneurs—but a clear picture of exactly how many Indians are working, and where, remains elusive.

The informal economy, hence, represents political or government failure from which India's government has taken gold as the 'fall guy'.

Finally, gold fits to a tee the informal economy

From the Economist (bold mine) 

Pune’s wide boys aside, the traditional gold consumers are southern peasants buying jewellery. They have no access to formal finance; gold requires no paperwork, incurs no tax and is liquid. But over the past decade the mania has spread. By weight consumption has doubled, for several reasons: a surge in money earned on the black market; investors chasing the gold price; and the dismal returns savers get from deposit accounts. Real interest rates are low, reflecting high inflation and a repressed financial system that is geared to helping the state finance itself.

Another significant factor why the war on gold will fail is political insanity: doing things over and over again and expecting different results. 

Attacking gold as part of financial repression measures has previously failed, it shouldn't be different this time

From the same Economist article:

India has tried coercion. Between 1947 and 1966 it banned gold imports. After that it used a licensing system. Neither worked. Smuggling soared and policymakers were reduced to tinkering with airport-baggage allowances. By 1997 trade was liberalised.

All these political pretenses which are really intended as confiscations of private savings whether through gold, cash transactions, bank deposits or bitcoins (cryptocurrencies) will eventually be exposed for the fraud they are.

India's war on gold will only intensify the growth of smuggling and the informal economy.  

India's war on gold signifies also an expression of growing desperation by the Indian political class over their hold on power whose economy has partly been buoyed by credit bubbles.

India's war on gold could likewise be a part of the grand design of the cabal of political institutions or the banking system, central banks and welfare warfare states led by Wall Street in working to preserve the current unsustainable system by spreading disinformation and by the manipulation of the markets in order to dissuade the public on currency alternative options as gold or bitcoins.

War on Gold: India bans Import Consignments

Well we don’t need a conspiracy plot to know that India’s gold trade has repeatedly been under assault from her government.

From the Reuters:

Gold buying in India, the world's biggest buyer of the metal, came to a halt on Tuesday, a day after the central bank restricted gold imports on consignment basis and jewellery sellers saw a sharp rise in festival sales.

On May 13, the Reserve Bank of India (RBI) banned gold imports through consignment, and traders awaited for more clarity from the central bank. Gold and silver imports rose 138 percent in value terms to $7.5 billion, data from the trade ministry showed, increasing pressure on the current account balance.

This has likely been in reaction to the fantastic 138% jump in gold imports last month, which has been spurred by a demand spike following gold price's flash crash fomented by Wall Street.

From the Hindu Times:

Terming the 138 per cent surge in gold imports last month as an ‘aberration’, the government on Tuesday expressed the hope that the appetite for foreign gold would subside by next month due to the high inventory costs.

Overall, the recent surge in imports has attributed to the drop in global commodity prices, including gold.

Talking to reporters, Economic Affairs Secretary Arvind Mayaram said it appears that to hedge against future rise the traders in India have imported large quantity of gold.

If it is true that 138% surge in gold imports has been an ‘aberration’, then why the need for the import ban? Obviously the Indian government wants to make sure that the proclaimed ‘aberration’ becomes a reality through social controls.

What such controls will do instead is to drive gold trades underground and push up premiums as supply shrinks.

Media appears to have already been in cahoots with the government in the implicit campaign to downplay or shoot down India’s feverish gold trade. 

Taking a look at last Friday’s headlines from Reuters, it says "Gold Stuck in a Trading Range, physical demand down"

Has physical demand really been down?

More from the report: “Gold futures edged lower on Friday, but still stuck in familiar trading range, though demand from physical buyers was down compared with last week amid limited supplies ahead of a major gold buying festival.” (bold added)

Physical demand has been down because lack of supply? Gee. Lack of trade due to limited supply doesn’t necessarily mean physical demand is down. This may be so because limited supply means extremely high premiums. 

While this may be a journalistic gaffe, on the other hand, it could well be a misrepresentation.

All these reveals how financially desperate governments have been tightening the noose on the public’s savings by attempting to wring out currency alternatives such as gold and bitcoin.

Desperate times calls for desperate measures. 

Here’s a guess, India’s government will fail in her quest to quash the gold trade, which has not been only a cultural affinity but also a monetary-purchasing power issue.

India: The Rise of a Nuclear Power

A brewing cold war has been developing which has not been in the radar screens of the mainstream.

Writes historian Eric Margolis at lewrockwell.com:

While the United States beats the war drums over North Korea and Iran’s long-ranged nuclear armed missiles –which they don’t even possess – Washington remains curiously silent about the arrival of the world’s newest member of the big nuke club – India.

In January, Delhi revealed a new, 800km-ranged submarine launched missile (SLBM) designated K-15. Twelve of these strategic, nuclear-armed missiles will be carried by India’s first of a class of domestically built nuclear-powered submarine, "Arihant." India is also working on another SLBM, K-5, with a range of some 2,800km.

These new nuclear subs and their SLBM’s will give India the capability to strike many high-value targets around the globe. Equally important, they complete India’s nuclear triad of nuclear weapons delivered by aircraft, missiles, and now sea that will be invulnerable to a decapitating first strike from either Pakistan or China.

Last February, it was revealed that India is fast developing a new, long-ranged, three-stage ballistic missile, Agni-VI. This powerful missile is said to be able to carry up to ten independently targetable nuclear warheads, known as MIRV’s.

Agni-VI’s range is believed to be at least 10,000km, putting all of China, Japan, Australia, and Russia in its range. A new 15,000km missile capable of hitting North America is also in the works under cover of India’s civilian space program. India is also developing accurate cruise missiles and miniaturized nuclear warheads to fit into their small diameter.

These important strategic developments will put India ahead of other nuclear powers France, Britain, North Korea, and Pakistan, about equal in striking power to Israel and China, and not too far behind the United States and Russia.

Delhi says it needs a nuclear triad because of the growing threat of China, whose conventional and nuclear forces are being rapidly modernized.

This writer has been reporting on the nuclear arms race between India and China since the late 1990’s. China has replaced Pakistan as India’s primary nuclear threat. Even so, Indian and Pakistani nuclear forces remain on a frightening hair-trigger alert within only a 3-5 minute warning time of enemy attack, making the Kashmir cease-fire line (or Line of Control) the world’s most dangerous border.

Pls. read the rest here.

World spending on nuclear weapons as of 2011 from icanw.org

Air India’s Failure: Epitome of Bureaucratic Enterprises

Massive infusion of taxpayer money has failed to revive the viability of government owned airline carrier, Air India

From a Bloomberg report,

Indian taxpayers gave Air India Ltd. $1.7 billion as bailout funds in the past four years. The airline now says it lacks cash to purchase spare parts.

That’s grounded 16 aircraft for the nation’s oldest carrier. Without the funds, the airline is also unable to refurbish some of the idled planes before returning to lessors.

“Some are just empty shells standing,” Air India Chairman Rohit Nandan said about the grounded aircraft. “We are in the process of returning some leased planes.”

The grounded planes add to the struggles of the former monopoly carrier saddled with about $8 billion of debt and six straight years of losses. Air India has also lost market share as discount carriers that started flights less than a decade ago lure passengers with the latest fleet and cut-rate fares.

Inability to fully utilize the fleet means Air India, the nation’s largest by number of aircraft, will operate fewer local flights than smaller rivals. The flag carrier won approval to operate 1,788 departures a week in the six months through September compared with IndiGo’s 2,821 and SpiceJet Ltd.’s (SJET) 2,467, according to the Ministry of Civil Aviation.

“It’s a criminal waste of public money,” said Harsh Vardhan, chairman of Starair Consulting, a New Delhi-based company that advises airlines. “With all this funds pumped in, what’s stopping Air India from spending on aircraft? They have to deploy fleet, expand network, increase frequency and go for market share.”

Since the Indian government liberalized the airline industry via the repeal of the Air Corporation Act of 1953 in 1994, privately owned firms dominated the market share. Air India’s share, from a monopoly, had been reduced to an estimated 18% of the domestic market.

The merger between Air India and Indian airlines, hobbled by labor unions, have reportedly been a factor in Air India’s continued losses.

Another important variable has been high prices of jet fuel which emanates from high taxes, around 32% of aviation fuel comes from a combination of sales tax, excise tax and freight related costs, as well as, from the inefficiencies of state owned oil marketing companies. High fuel prices has made domestic airlines less competitive relative to international counterparts. As of 2011, 5 of the top 6 major airlines were in the red.

Air India’s case is a classic example of the difference between bureaucratic firms and private companies which boils down to economic calculation.

As the great Ludwig von Mises explained:

A bureau is not a profit-seeking enterprise; it cannot make use of any economic calculation; it has to solve problems which are unknown to business management. It is out of the question to improve its management by reshaping it according to the pattern of private business. It is a mistake to judge the efficiency of a government department by comparing it with the working of an enterprise subject to the interplay of market factors…

Like any kind of engineering, management engineering too is conditioned by the availability of a method of calculation. Such a method exists in profit-seeking business. Here the profit-and-loss statement is supreme. The problem of bureaucratic management is precisely the absence of such a method of calculation.

In short, political enterprises are operated mainly from political goals, whereas the free market runs under the discipline of profit and losses. 

One should also make a distinction between private companies operating under the influences of politics or rent seeking “crony” firms.

Indian Government Agencies Squabble over Inflation

I have been saying here that QE has not been a practice limited to developed economies, but has become a global central bank operating standard.

In India, in what seems as pot calling the kettle black, two government agencies wrangle over who is responsible for causing of “inflation”.

From Bloomberg, (bold mine)

The biggest critic of India’s $100 billion budget deficit is also one of the largest purchasers of the debt that finances it: the central bank.

The Reserve Bank of India faults government expenditure for stoking inflation even as its sovereign-bond holdings have risen to $91 billion from negligible amounts in 2008. While it has a mandate for price stability -- like counterparts in the U.S., Europe and Japan -- the RBI has another charge its peers lack: ensuring the government achieves its borrowing program.

The RBI’s ability to damp the cost of living may be further curtailed by record government borrowing and spending next fiscal year, stoking demand and prices in an economy facing supply constraints. The inflation threat adds pressure on India to join nations from the U.S. to Brazil in separating debt management from inflation control. A bill to do so has been sent for cabinet approval, two Finance Ministry officials said…

The bank holds about 27 percent of the sovereign bonds issued since 2008, when its holdings stood at $2.5 billion, according to calculations by Bloomberg News based on RBI data.

The late great dean of the Austrian school Murray Rothbard lucidly explains the disparity between budget deficits/deficit spending and inflation: (bold mine)

Deficits mean that the federal government is spending more than it is taking in in taxes. Those deficits can be financed in two ways. If they are financed by selling Treasury bonds to the public, then the deficits are not inflationary. No new money is created; people and institutions simply draw down their bank deposits to pay for the bonds, and the Treasury spends that money. Money has simply been transferred from the public to the Treasury, and then the money is spent on other members of the public.

On the other hand, the deficit may be financed by selling bonds to the banking system. If that occurs, the banks create new money by creating new bank deposits and using them to buy the bonds. The new money, in the form of bank deposits, is then spent by the Treasury, and thereby enters permanently into the spending stream of the economy, raising prices and causing inflation. By a complex process, the Federal Reserve enables the banks to create the new money by generating bank reserves of one-tenth that amount. Thus, if banks are to buy $100 billion of new bonds to finance the deficit, the Fed buys approximately $10 billion of old Treasury bonds. This purchase increases bank reserves by $10 billion, allowing the banks to pyramid the creation of new bank deposits or money by ten times that amount. In short, the government and the banking system it controls in effect "print" new money to pay for the federal deficit.

Thus, deficits are inflationary to the extent that they are financed by the banking system; they are not inflationary to the extent they are underwritten by the public.

The RBI can always opt NOT to finance the government deficits via QE or debt monetization. But such would undermine the reason for their existence.

At the end of the day, all such manipulations and political accommodations through central banking inflationism will have nasty consequences.

War on Gold: India’s Smuggling Soars, Vietnam Charges Fees on Deposits, Turkey’s Gold Deposits

What happens when governments think that they can legislate away people’s preferred activities? Well, the obvious outcome has been to shift such activities underground. This applies to social activities like vices e.g. gambling, drugs, alcohol and etc..., security (e.g. guns) or even to money (via gold ownership).

In the case of the Indian government which has recently slapped higher import taxes on gold, the consequence has been that of the explosion of gold smuggling.

Notes the Mineweb: (bold mine)

Cases of smuggled gold entering India are coming in thick and fast. Almost as fast as gold coins and jewellery pieces are flying off retail shelves…

Despite India's best efforts to curb illegal gold imports, which included a boost to the nation's customs in 2012, gold smuggling has been rather rampant.

According to the All India Gems and Jewellery Trade Federation, India imported 950 tonnes in 2012. Of this, 250 tonne has come into the country through the illegal channel.

``In 2011, India imported over 900 tonnes of gold and none of it came through smuggling. The hike in customs duty has not stopped the import of gold into the country. It has only changed the route as smugglers earn a profit of around $3,719 (Rs 200,000) on every kilogram of gold smuggled into the country,'' said Federation Chairman Bachhraj Bamalwa.

The duty rate hike has not dampened demand, it has just enhanced the profit margin of smugglers, he added.

Finance ministry data shows $175 million (Rs 9.4 billion) worth of gold was seized from more than 200 cases of smuggling during April to July 2012. This was a 272% rise from the level of the previous year. Moreover, between 2006-07 and 2010-11, gold seizure was almost nil, data from the directorate of revenue intelligence shows.

In the first 10 months of 2012-13, India's Directorate of Revenue Intelligence seized gold worth $11 million (Rs 601 million) which is some 200kgs at the current price, and cracked 36 cases of smuggling.

The Directorate of Revenue Intelligence is an agency that monitors economic offences. Officers said the incidence of gold smuggling in the current fiscal year has grown by more than eight times as compared to the corresponding period in the previous year.

They added that spot gold prices in India are 5.7% higher than in Dubai. Typically, gold is smuggled into India from neighbouring Dubai and Thailand.

So the implicit gold prohibition via taxation has only been rewarding the smugglers (who are most likely the politically connected), but failing in its goal to “dampen demand”. Talk about policy failure. 

Besides even the relatively higher prices which the average Indians pay for has not curtailed demand.

The Indian government’s war on gold has been premised on all sorts of red herring. They blame gold for contributing to trade deficits, in as much as, supposed risks posed by gold to the banking system. 

For instance for countries who carry cultural affinity for gold, the Business Insider notes that “where gold is a popular investment, those financial institutions which carry large gold deposits, lend cash against gold or offer interest-bearing gold deposit accounts, can pose a risk to the financial system if commodity prices suddenly shift.”

This simply hasn’t been true.

The reality is that the war on gold is about passing the blame on people for what truly has been about government profligacy and policy failure. This has been the case with India which I pointed out in the past.

Aside from cultural legacy, the average Indians value gold for as hedge against currency debasement, again from the Business Insider

Many Indians use gold to hedge investments against inflation. But a working group convened by India’s central bank recently advocated a range of alternative investment products which could be used by the public as an alternative to gold for inflation hedging. Gold-linked savings accounts, bonds and certificates that entitle a holder to physical gold could help reduce demand and quickly move more liquid assets into the country’s banking system, the group suggested.

Gold priced in rupee has skyrocketed by 115x from about 800 INR in 1973 to 93k INR in 2013. (chart from gold.org). The realization of such collapse in real currency value makes the average Indians want to own gold for savings.

However the Indian government essentially wants to arbitrarily transfer people’s savings to the government, channeled through inflation, from which the average Indians have balked at. And so the rampant smuggling.

The same dynamic applies to Vietnam

From the same Business insider article (bold mine)

Vietnam’s government is trying to tackle a similar problem through aggressive intervention in the local gold market. More than 31 percent of Vietnamese households keep some of the shiny stuff on hand, according to a survey by a government finance committee cited in a recent Credit Suisse note. High inflation levels and a weakening Vietnamese currency have made Vietnamese investors even more eager to snap up gold.

The Vietnamese government has intervened to mitigate the resulting spread between local and international gold prices. After temporarily suspending interest-bearing gold deposit accounts and certificates in 2011, the government has told banks and credit facilities to phase out gold deposits and loans for good. The government has also taken over the country’s largest gold refinery, and the State Bank of Vietnam is rolling out a new set of licenses allowing traders to buy and sell gold bars only if they meet strict requirements.

As noted above, the Vietnam government’s attack on gold not only has forced the banking system to charge fees on gold deposits but importantly has used gold as an instrument for controlling banks.

As Kel Kelly at the Mises Canada notes, (chart above his, italics original)

Recently, however, the government-run Vietnamese central bank disallowed loans in gold. Now, it is preventing banks from paying interest to customers on their gold. Instead, it is forcing banks to charge customer to store their gold, and requiring banks to regularly report on their transactions with account holders.

What’s happening is that the government wants to prevent citizens from using alternatives to its own quickly devaluing currency. This, way, the government can continue to steal purchasing power from its citizens through inflation.

Taxing the citizenry for holding gold has been just one approach. The other more conciliatory approach has been to migrate the gold held by the households to the government controlled banking system for the banks to use them.

Notes the Mineweb: (bold mine)

"Gold-based deposit accounts [in Turkey] surged 15% this year through the end of July," explained BusinessWeek back in October, "three times the increase in standard savings accounts."

"Although much criticised for its use of 'unconventional measures'," the Financial Times added in December, "few would argue that the decision last year by Turkey's central bank to allow the country’s banks to buy gold was anything less than a roaring success."

Buying gold isn't quite right. Starting in October 2011, the central bank began allowing commercial banks to hold a portion of their "required reserves" – needed to reassure depositors and other creditors they had plenty of money to hand – in physical gold bullion. Starting at 10%, that proportion was then raised to 30%.

Private citizens were similarly encouraged to hold their gold on deposit with their banks. That gold was thus transferred to the central bank's balance sheet. Et voila! Privately-owned gold now backed the nation's finances. A smart idea, which has coincided with Turkey's currency rising, interest rates falling, huge current-account shrinking, and government bonds regaining "investment grade" status.

Publicly targeting some of Turkey's estimated 2,200 tonnes of "under-the-pillow" gold, currently worth some $119 billion, the CBRT's governor Erdem Basci has meantime been awarded The Banker magazine's prestigious "Central Banker of the Year 2012" award.

Turkey’s government may be more successful in trying to take advantage of people preference for gold by synthesizing gold with banks through gold deposits, relative to the  antagonistic approach by India and Vietnam. 

Yet Turkey's accommodation may be linked to her gas-for-gold trade with Iran where the latter have been slapped by an economic embargo by the US along with her allies.

But Turkey’s gold integration with the banking system can be seen with suspicion. Banks who currently hold gold deposits may become agents of confiscation in the future when the government would have a change of heart.

The US did so in April 5, 1933 via Executive Order 6102 signed by then US President Franklin Delano Roosevelt

The bottom line is that governments disdain competition particularly with money, such that they will resort to taxation or outright confiscation. But all these will not stop people from protecting their savings through hard currencies such as gold.

Is the US Federal Reserve Indirectly Putting Down Gold Prices?

Have US Federal Reserve officials been indirectly trying to take down gold prices?

In barely 2 weeks of 2013, gold prices attempted twice to move higher (See ellipses). One peaked during New Year just right after the fiscal cliff deal. The second was during Thursday of this week.

However, both gains had been cut short. This appears coincidentally timed with two occasions where Fed communications (FOMC minutes) had been released and when Fed officials went on air expressing doubts over QE 4.0.

The first came with the announcement of the FOMC minutes which revealed of growing dissension over unlimited asset purchases, a day after the fiscal deal.  I earlier wrote that this signifies another of the Fed’s serial Poker bluff. 

Last night, while switching channel after watching another TV program, I happen to stumble upon Federal Reserve Bank of Philadelphia President Charles Plosser’s Bloomberg interview, where he hinted of his bias against pursuing more balance sheet expansion. If memory serves me right, prices of gold was then trading at $1,669-1,670. Bloomberg seem to have featured this interview in a follow up article

Then I learned today that other Fed officials featured by mainstream outlets also covered the FED hawks.

And in both occasions where hawkish sentiments by FED officials were aired, the earlier gains scored by gold prices had nearly been erased.

Gold has been marginally up this week.

Considering that FED employs communication strategies to influence market behavior called as “signaling channel”, my suspicion is that this has been part of the implicit tactic to mute the public’s inflation expectations, expressed via gold prices.

Nonetheless, I expect such mind manipulation ploys to be ephemeral.

That’s because as I pointed out during my last stock market commentary for 2012

Evidence suggest that gold prices may have departed from real world activities. Sales of physical gold have exploded to record highs. Moreover central bank buying has been gathering steam, which seems on path to hit new highs this year (500 tons), along with record ETF gold holdings at 2,627 tons.

It seems that only after a month, we are getting more proof on this

In the US, sales of physical gold and silver has been exploding: The US mint reports 57,000 gold ounce sales for the first two days of the year and sale of silver coins tripled from December.

In the meantime, India’s gold imports reportedly surged amidst fears that the Indian government may continue to act to suppress demand for gold. According to Mineweb.com, after two earlier hikes of import duties, gold smuggling has also reached new levels. Smuggling is a typical reaction to prohibitions or quasi-prohibitions edicts via tax increases.

In addition, central bank gold buying have also been ramping up. According to International Business Times

In the third quarter, according to the World Gold Council (WGC), the world's central banks bought a total 97.6 metric tons of gold.

In six out of the last seven quarters, central bank demand has been around 100 metric tons, which is a sharp increase from as recently as 2010, the bank said in a statement, adding that through the third quarter of this year, total central bank buying was up 9 percent.

Moreover, China's government via the PBoC reportedly will increase gold acquisition to diversify from her foreign exchange holdings.

The China Daily notes,

China may decide to increase the percentage of gold holdings in its monetary reserves in the next few years, said the report, an analysis of the world monetary system commissioned by the World Gold Council.

Demand for gold is likely to rise amid the uncertainty about the stability of the US dollar and the euro, the main assets held by central banks and sovereign funds, it added.

China almost doubled its gold reserves in the last five years. The country had holdings of 1,054metric tons in July 2012 and is now the sixth-largest holder of monetary gold.

In 2011, gold accounted for 14.4 percent of the world's total monetary reserves.

In a country-by-country comparison, the figure was 1.6 percent in China, while it was 74.5percent in the United States, 71.4 percent in Germany and 71.1 percent in France, according to data from the World Gold Council and the International Monetary Fund.

China holds the world's largest foreign exchange reserves, which were worth more than $3.31trillion by the end of 2012, according to figures from the People's Bank of China, the country's central bank.

China has been approaching gold with “talk the talk” as November gold imports have doubled from October.

According to Zero Hedge, (italics original)

at 90.8 tons, this was the second highest gross import number of 2012, double the 47 tons imported in October (which many saw,incorrectly, as an indication of China's waning interest in the yellow metal), and brings the Year to Date total to a massive 720 tons of gold through November. If last year is any indication, the December total will be roughly the same amount, and will bring the total 2012 import amount to over 800 tons, double the 392.6 tons imported in 2011.

Meanwhile, ETF holdings of gold remain at record levels

 

According to my digital financial chronicle,

Exchange traded funds (ETFs), with gold as the underlying asset, have contributed to its prices. Institutional and retail inflows into global gold ETFs are at record levels. ETF holdings have been a key indicator of price movements in the recent years. Reports suggest that at November end last year ETF holdings were at an all-time high of over $150 billion. Till November, holdings in ETFs had risen by 12 per cent to 2,630 tonnes.

In short, the strings of record highs from various activities such as buying of physical gold, ETF holdings, record imports of China and India (two largest gold consumers) and lastly central bank buying simply doesn’t square with current consolidation phase.

Interventions to suppress gold prices are likely to have short term impact.

Why Kashmir is Tinderbox for a Nuclear War

Historian Eric Margolis at the lewrockwell.com warns that the contested Kashmir region should always be in one’s radar screen since the area is a flashpoint that can precipitately trigger a world war with the pronounced risks of nuclear exchanges.

India and Pakistan have fought three wars and some very large battles over Kashmir. Both claim the entire mountain state. Pakistan’s intelligence service, ISI, has waged a long covert campaign to insert guerillas into Indian Kashmir to aid a series of spontaneous rebellions against Indian rule by the state’s Muslim majority…

Muslim Kashmiris have been in almost constant revolt against Indian rule since 1947 when the British divided India. Today, 500,000 Indian troops and paramilitary police garrison rebellious Kashmir. Some 40,000-50,000 Kashmiris are believed to have died over the past decade in uprising.

India blames the violence in Kashmir on "cross-border terrorism" engineered by Pakistani intelligence. Human rights groups accuse Indian forces of executions, torture, and reprisals against civilians. Large numbers of Hindus and Sikhs have fled strife-torn Kashmir after attacks by Muslim Kashmiri guerillas. It’s a very bloody, dirty war.

The Kashmir conflict poses multiple dangers. First is the very likely chance that local skirmishing can quickly surge into major fighting involving air power and heavy artillery. In 1999, a surprise attack by Pakistani commandos into the Indian-ruled Kargil region provoked heavy fighting. The two nations, with more than one million troops facing one another, came very close to an all-out war. I have on good authority that both sides put their tactical nuclear weapons on red alert. Angry Indian generals called on Delhi to use its powerful armored corps to cut Pakistan in half. India’s cautious civilian leadership said no.

Second, the Kashmir conflict also involves India’s strategic rival, China. Beijing claims the entire eastern end of the Himalayan border separating India and China, which Chinese troops occupied in a brief 1963 war. China also occupied, with Pakistan’s help, a high strategic plateau on the western end of the Himalayas known as Aksai Chin that was part of historic Tibet.

China is Pakistan’s closest political and military ally. Any major Indian attack on Pakistan would risk intervention by Chinese air, ground and missiles forces in neighboring Tibet.

Third, in the midst of all these serious tensions, India and Pakistan’s nuclear weapons – delivered by air and missile – are on hair-trigger alert. This means that during a severe crisis, both sides are faced with "use it, or lose" decision in minutes to use their nuclear arsenals.

The strategic command and control systems of India and Pakistan are said to be riddled with problems and often unreliable, though much improvement has been made in recent years.

A false report, a flight of birds, and off-course aircraft could provoke a nuclear exchange. By the time Islamabad could call Delhi, war might be on. A US Rand Corp study estimated an Indo-Pakistani nuclear exchange would kill two million immediately, injure or kill 100 million later, pollute the Indus River and send clouds of radioactive dust around the globe.

Given the recent skirmishes and the suspension of trade links, as well as the increasing use of territorial claims by governments as camouflage or as diversion to homegrown economic malaise and of the increasing political recourse towards policies of redistribution via financial repression, this area seems more geopolitically sensitive or more fragile than the East Asia’s territorial dispute.

Substitution Effect: Many Indians Shift from Gold to Silver

Social policies impacts the incentives which drives people’s action.

From Mineweb.com 

It is not just gold that caught the eye of Indian consumers celebrating Diwali. Brisk business in silver was also seen in select parts of the country.

Given the high price of gold and the Indian government’s new regulation on buying gold and tax deductions at source, the sale of silver items at jewellery shops soared to a new high.

The average Indian’s response to new regulations and higher taxes on gold buying has been to substitute gold for silver. On most occasions, the typical substitution effect has been anchored on pricing.

Given that India remains the leader in the world’s gold consumption, which materially declined from  record highs in the third quarter, then the shift to silver may have altered the balance of relative price performance between gold and silver.

The chart above gold: silver ratio depicts that gold outclassed silver from May until August. However, silver bested gold in August to September which may have reflected on India’s pre-Diwali celebrations silver buying spree. But gold, despite the recent declines, seems to have regained the leadership.

Nonetheless the above exhibits demand for gold in terms of jewelry, coin and bar by the top two world consumers, India and China, from 2009 until the second quarter (charts from AdvisorAnalysts.com).

Bottom line: The Indian government’s war on gold, which has been an attempt to camouflage the government’s profligacy, has hardly altered the traditional demand for precious metals nor have the government persuaded the average Indians to shift to non-gold assets. 

However, the shift to silver implies that India’s authorities may expand taxes and regulations to cover silver.