The Phaserl


India’s Gold Monetization Scheme: Will It Work?

from The News Doctors:

Remember the golden rule: He who has the gold makes the rules. Governments throughout history have tried to monopolize the issuance of money, accumulating hoards of gold and silver to spend on their adventures, often by forcing debased coinage on the populace. Even though gold doesn’t play quite the monetary role that it used to, private ownership of gold is still a hedge against government devaluation of currency units. The more gold in the hands of private individuals, the less devaluation the government can get away with before people stop using government money and return to gold.

India, as one of the world’s largest consumers of gold, has a long and special relationship with the metal. In particular, Hindu shrines in India hold large amounts of the metal, brought to them by Hindu pilgrims making offerings to the gods. One temple in particular, the Sri Padmanabhaswamy temple, holds an estimated 3,000 tonnes of gold, more than all other gold-holders except for the United States and German governments. Naturally, the Indian government would like to get its hands on that gold.

The Indian government has used a plethora of arguments to justify its desire to possess this gold. It has invoked the typical bogeyman of money laundering. It has tried to paint gold stores as non-productive assets. It has stated that acquiring this gold would help the government reduce its current account deficit. But the real reason is that all this gold in private hands undermines the government’s attempt at monopolizing the monetary system. India has constantly engaged in easy monetary policy, weakening the rupee and driving up prices. In response, Indians continue to hold gold and to import more in order to use it as a store of wealth and a hedge against inflation. Gold imports rose to such levels that the government decided to levy a 10% tariff on gold imports in an attempt to stifle gold demand.

The Indian government recently launched a gold monetization scheme in an attempt to get its hands on privately-held gold. The idea would be that individuals would hand their gold over to banks to store in accounts, for which accountholders would then receive interest payments. After the first few weeks of the scheme, it appears to be a complete failure. Depending on the source, the total amount of gold surrendered to the government is somewhere between 400 grams and 30 kilograms, out of an estimated 20,000 tonnes of privately held gold. That doesn’t bode well for the Indian government’s new gold bullion coin scheme either. Why are so few people participating in the government’s new scheme?

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