I’ve received a couple comments (one from the US and one from Italy) re the rise in the price of Gold in India, due to the overnight ban on the common denomination Rupee notes. Some points to understand…
1 It is not, as claimed, an attempt to stop corruption; stop corruption in India and the whole country will grind to a halt. Only a small percentage of people pay tax in India. Even houses are sold with some minor percentage declared to the government and the rest handed over in cash. Every individual takes and gives bribes.
Politicians and public servants are just as reliant on corruption, probably more so, as the man on the street. So no, it is not any sort of fight against corruption, it is an attempt by the government to get their hands on cash, cash that they desperately need. Like the rest of the world, India is in big trouble. This move, with all its attendant political and currency risks, shows just how big their problem must be.
2 It is NOT Gold going up. Prime Minister Narendra Modi of India is powerless to alter the value of that which has remained stable for 3,500 years. What has happened is that the surprise announcement by the Indian government has caused the value of the Rupee to plummet, thus Gold will only be exchanged for a greater quantity of them. How could it have been otherwise? Academic theory telling you that paper debt notes are going to be worthless becomes quite another matter when your own government puts a time and date on it.
The Indian government has just caused the servicing of their o/s debts, about US$495 billion, to rise, by an amount unknown to me. Will the amount confiscated, for that is what it amounts to, be sufficient to cover that? Probably not, particularly in the long term. It is hard to imagine that Indians will quickly forget all about this and immediately feel secure in the newly issued notes. Doubt in a currency once sown, is very hard to unplant.