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India's Convoluted Gold Scheme

 -- Published: Thursday, 21 May 2015 | Print  | Disqus 

By Craig Hemke

There's been a lot of talk about this today, highlighted by a dedicated post at ZeroHedge this evening. In the hope of minimizing the confusion, I thought we should give this topic its own thread.

Basically, here's the deal.

Indian citizens have long recognized the value of owning and saving in gold...and for good reason. As the Royal Bank of India has aggressively devalued the rupee over the past 5 decades, the value of gold in rupees has skyrocketed! See for yourself:

By some estimates, private holdings of gold in India exceed 20,000 metric tonnes. Though a sensible person would see this as a long-term positive for India, the Keynesian brain trust of the RBI see this as short-term negative, instead. Why? Because the Indian central planners would prefer that regular Indian citizens save in rupees, not gold, thus increasing demand for rupees and driving up, or at least stabilizing, its value. Keep in mind, when an Indian citizen buys gold, he/she is selling rupee to do it. Therefore, more gold imports equals downward pressure on the rupee.

So, in the hopes of decreasing gold import demand, the disingenuous larcenists at the RBI have cooked up the scheme outlined in the document below. Please scroll through it in order to see for yourself what the intent of this program is.

Draft Gold Monetization Scheme by zerohedge

To sum up, here is what the RBI intends to do:

  1. Collect gold from regular citizens. Offer to store it for them. Even pay them interest. The RBI has even gone so far as to make the interest paid tax-free, in order to entice more users to the system.
  2. The collected gold gets reassayed and melted into conventional bars and coins.
  3. Indian banks then sell this very same gold to gold consumers such as Indian jewellers. The effect is the same as Western leasing and rehypothecation. Simply put, there will now be at least two beneficial owners of the same ounce of gold.
  4. By utilizing this domestic "supply", the RBI hopes to curb gold imports. By extension, this eases the selling pressure on the rupee and boosts its value.

So, in the end, the key here is whether or not the average Indian citizen is gullible enough to entrust their gold to this new, government-backed ponzi scheme. When I asked Andrew Maguire about this last week, he laughed at the notion, saying something to the effect that "no way the Indian people are stupid enough to fall for that". I'm not so sure. As P.T. Barnum-Gupta-Singh once said: "There's a sucker born every minute, even in India". Sadly, I'm sure he's right. With Indian gold import demand on pace to reach about 800 metric tonnes in 2015, shaking loose just 4% of India's domestic "supply" would negate the need for further imports.

Therefore, this is a story that we'll have to closely monitor. In the meantime, if you're reading this from India OR if you know anyone there, please dissuade them from participating in the program. Not only does it damage global gold demand, at the grass roots level these ordinary folks are going to get taken to the cleaners. If you think for one second that your gold on deposit at an Indian bank is just going to be sitting there, earning "interest" and waiting for you to come by and pick it back up at the time of your choosing...well, I've got some nice swamp land south of Kolkata I'd like to sell you.

Please warn your Indian friends against participating in this scheme...before it's too late.


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