While FT Alphaville’s coverage of the Indian gold monetisation schemes started
off with “why gold investing in and of itself is stoopid” they did
note that
“people, especially in fledgling economies, are distrustful of sharing
because they’re worried about payback. That kills trust, which consequently
ensures capital isn’t put to productive use … there is also a real (and dare
we say warranted) distrust of government and an historically deep-rooted
inflation fear to take into account”
As Jayant Bhandari
observed in his Precious Metals Investment Symposium presentation, India is a
negative-yielding economy, with nominal yields on property and stocks below
the 10 year government bond (even cows return -6% assuming zero labour
costs). In such an environment, a zero-yielding asset like gold is better
than a negative yielding asset.
The Indian government’s gold monetisation schemes, however, are more about
addressing the symptom rather than the disease, which is the lack of trust in
“payback”. Jayant says that high levels of corruption, superstition and
irrationality in India “discourages accumulation of financial
and intellectual capital”. But dealing with that, I guess, is a lot
harder than trying to hoodwink “its population to take a leap of faith on
the trust front”.
Why do I say hoodwink? Firstly, as I discussed in this post, the lending of any physical gold deposited in
the schemes will have a one-off impact on throttling Indian gold imports.
Secondly, as discussed in this post, the other uses the Government of India says it
will make of the gold and the way it will run its Sovereign Gold Bonds Scheme
mean that the government is simply going naked short gold in Rupees, as they
themselves acknowledge in this press release:
“the risk of increase in gold price that will be borne by the
government” and they “will not be hedged and all risks associated
with gold price and currency will be borne by GoI”.
With that sort of risky behaviour from their own government, who really is
stoopid – those holding physical gold or those trusting the
government schemes?
