Sunday, March 13, 2016

Quickies: Governments And Gold Part 2

     We know from long and broad experience that governments hate gold. It functions as a barometer of governmental currency depreciation, which is useful all by itself. It has an excellent record as a store of value, which is why gold demand rises along with the inflation rate. However, among clever people it also serves as a medium of exchange: i.e., a true money.

     I noted a few days back that India, where unadorned gold circlets serve as an alternate, untraceable currency, is trying to put a clamp on the precious metal. Today we have a follow-up:

     One of the immediate effects of the 1% sales tax announced on February 29 was a massive outcry from India’s jewelers. Who launched a full-scale strike on March 2 to protest the levy.

     That work action has reportedly brought gold sales in the country to a standstill. With one professional in the Indian refining industry telling Platts on Tuesday that there is “no buying anywhere” across the nation.

     Why is there “no buying?” In part because of the reporting requirement that accompanies the new tax, but in at least equal part because there’s no selling. Those who have gold, seeing that the influx is to suffer, are holding on to what they have. In response, India’s many jewelers are straining to reach a compromise with the government, so that trading in gold will be reinvigorated:

     The Jewellery Federation director Ashok Minawalla told local press that India’s jewellers have offered to stop selling gold bullion directly to consumers. A practice that up until now has been common — with gold buyers often picking up gold bars from jewellers as investment holdings....

     This suggests that the decision from the jewelry federation could cut demand by up to 300 tonnes, or 9.65 million ounces, annually. A figure that would equate to 7.1 percent of total global demand from 2015.

     The jewelers aren’t offering to stop selling those handy gold circlets, though. Indeed, the story is accompanied by a picture of them. So the probability seems high that any reduction in the sale of gold bars will be offset, perhaps completely, by the production and sale of gold circlets.

     It’s highly unlikely that Indians who’ve become accustomed to using gold as an alternative currency will abandon the practice. It’s become too much a part of how the Indian economy operates, and too important to the day-to-day budgets of too many Indian households.

     Concerning gold and American uses thereof, note that 21 years elapsed between the creation of the inherently inflationary Federal Reserve system and Franklin D. Roosevelt’s seizure of Americans’ gold. The country had to grow accustomed to doing business in paper, as the statists of that era understood full well. Let’s watch how Indians react to this first attempt to impede that country’s gold market – and how the Indian government follows up on that reaction. It will be interesting at least.

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