One month ago, when reviewing India’s ploy to monetize the thousands of tons of gold held by the broader population through the issuance of “gold-backed bonds” (which would need to offer a rate of interest greater than inflation to be attractive but they won’t), we asked if this is “the start of India’s gold confiscation.”
As a reminder, as part of the plan, Indians would be allowed to “deposit their jewelry or bars with banks and earn interest, while the banks will be free to sell the gold to jewelers, thereby boosting supply. The deposits can be for a period of one year to 15 years with the interest on short-term commitments to be decided by the banks and those on long-term deposits by the government in consultation with the central bank.”
The sovereign gold bonds are aimed at people buying the precious metal as an investment. The securities may help shift a part of the estimated 300 metric tons a year investment demand, the government said in a separate statement. The bonds will be issued in denominations of 5 grams, 10 grams, 50 grams and 100 grams for a term of five years to seven years with a rate of interest to be calculated on the value of the metal at the time of investment, it said.
When stripped of its pompous rhetoric, what India is offering is simple: a gold-for-paper exchange, which however in a culture where gold has been the definition of money for centuries, would likely be a non-starter from the beginning. One look at the chart below showing Indian gold demands is sufficient to show just how ingrained in the Indian psyche gold hasbecome.
However, as we said a month ago, just because it is doomed from the beginning, at least in its current iteration, does not mean it won’t be tried (see: Abenomics)… or adjusted. Because this proposal was nothing short of the initial shot across the gold confiscation bow. Here is what else we said:
The one thing to watch for is a shift in the posture of the Indian government: for now participation in the gold monetization scheme is voluntary, and largely geared to the general public with the 500 gram/year limit. But if and when the Modi cabinet starts “urging” the population, and certainly when threats of fines and/or prison time emerge, that is when we will finally have confirmation that the second coming of Executive Order 6102 has arrived.
Fast forward to this weekend when while we still await the Indian government to unveil the “threats and fines” part, it started the “urging” when during an address on his monthly radio programme of “Mann Ki Baat”, Indian prime minister Modi “exhorted people to help convert gold to the nation’s economic strength by joining in various schemes to be launched soon” adding that “gold can be converted from dead money to an economic force. To leave gold lying as dead money is behaviour not in sync with the modern times,” he said.
We are grateful for this stark admission by India’s prime minister that in “modern times”, possession of a barbarous relic gold is a activity best relegated to barbarians – you see, “modern people” are all about lending, and rehypothecating their paper gold.
Still, Modi was at least truthful in noting that accumulating gold as a form of economic security is deeply rooted in India’s social tradition; as a result we expect the threats of fines and incarceration to follow shortly.
For those who are unfamiliar, the Khaleej Times reminds us of the details of India gold monetization plot:
Earlier in the week, the Reserve Bank of India issued norms for implementation of the gold monetisation scheme, under which customers can deposit their gold in banks and earn interest on it.
The minimum deposit required will be 30 grams of gold with fineness measuring 995. It could include raw gold in the forms of bars, coins and jewellery, excluding stones and other metals.
On maturity, the principal and interest will be linked to the prevailing price of gold at the time. The depositor will have the option to take gold or equivalent rupees.
The union cabinet approved the scheme last month.
As for the motives, we have covered them before, but here they are again: “the objective of the scheme is to mobilise gold, give a fillip to the gems and jewellery sector by making the metal available from banks on loan and reduce the reliance on imported gold.”
In other words, to take it away from the population.
And when this peaceful attempt at “remunerated” gold sequestration fails, the less “amicable” version of gold confiscation – usually involving threats of bodily harm and prison time – will emerge, as it always does when desperate economies scramble to force their population to stop saving (by buying gold), and start spending.