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Last night CBS' 60 Minutes aired a great segment on India's penchant
for buying gold. I've written a few thoughts below, but first watch the
segment:
http://www.cbsnews.com/video/watch/?id=7398482n
Notes
First, here are a few notes I took from the video:
1.2 billion people in India. 10 million weddings each year in India. Half of
the gold bought in India is jewelry for weddings. In India, a family without
gold is an "incomplete family."
Indian households save about 30% of their income compared to Americans who
save about 5%.
The tradition that a bride's parents will give her gold is a financial burden
to some families.
Gold is so important to the lives of Indians that the poor can now get
financing for it.
The World Gold Council is funded by a group of mining companies. Its
representative in India created the program to help India's poor buy gold.
Q: How can you be both frugal and conservative yet be willing to spend
thousands of dollars on gold?
A: When Indians buy gold, they don't think they're spending money. In their
minds, that is a savings. That purchase of gold is going to your savings
account. It's not an expense, it's an investment.
Indians believe the price of gold will continue rising. It is impossible to
tell an Indian consumer that the price of gold will fall, because the belief
that gold will continue rising is backed by its past performance.
Observations
To give you an idea of why Indians might view gold's past performance
differently than we do, here are two gold charts covering the same period,
1971-2004. The first is in dollars and the second is in rupees.
Gold in India is more than just a store of value. Gold is a
visible status symbol of such cultural importance that demand
for it apparently exceeds net-production (savings). Some are even willing to
borrow money to look like Mr. T, and the mining industry supports this.
To put this in perspective on an aggregated basis, India is importing around
$34B in physical gold while running a $150B overall trade deficit. And
the trade deficit is still growing, projected to reach maybe $160B this year.
India gold import bill may touch
$100 bn
New Delhi, Mon Feb 06 2012
The report said that at these levels, "gold imports are a huge burden on
the balance of payments and accentuates the current account deficit".
[…]
According to RBI, the current account deficit is a cause of concern because
of inelastic gold and oil demand, it said.
With the government increasing import and excise duties on gold and silver,
both commodities are set to cost more.
Terming the current gold import as huge burden on the balance of payments,
the chamber has urged the government to encourage formal financial
instruments to make the investment more productive.
"India's gold imports are unsustainable and the government should
encourage channelising savings in formal financial
instruments to increase productive capacity of the economy," it said.
It said efforts must be made to introduce more financial saving instruments
and extensive education campaigns should be undertaken - particularly in
rural areas - to minimise propensity towards gold.
The report said that post offices should be used to sell such government
guaranteed instruments to extend their reach throughout the country.
Being the largest importer of gold in the world, India accounts for nearly
one-third of the annual demand with import bill rising from USD 4.1 billion
in 2001-02 to USD 33.8 billion in 2010-11, it said.
Rupee appreciates for 6th
consecutive day on rising inflows, more gains seen
Reuters Jan 19, 2012
The main issue for the rupee has been the financing of its external
obligations, including the trade deficit, said Daniel Hui,
senior foreign exchange strategist at HSBC in Hong Kong.
[…]
India's trade gap widened to $43.9 billion in the September quarter from $37
billion a year earlier, while the current account deficit was little changed
at $16.9 billion.
[…]
India is the biggest consumer of bullion and the metal, along with crude oil,
forms a major chunk of the country's massive import bill.
Foreign institutional investors bought about $3 billion of Indian debt and
moved $854 million into shares since the new year began, data from the market
regulator showed on Wednesday.
India Trade Deficit Widens as
Import Growth Outpaces Exports
February 09, 2012, 9:59 AM EST
India’s trade deficit widened to a three-month high in January as
import growth outpaced the climb in exports, the top bureaucrat in the
commerce ministry said.
[…]
A trade gap Khullar said may reach $160 billion in
the current financial year threatens to revive pressure on the rupee after it
tumbled the most in Asia last year.
India facing serious balance of
trade problem
9 Dec, 2011
NEW DELHI: India is facing a serious balance of trade problem, Trade
Secretary Rahul Khullar said on Friday, as export
figures so far in the current fiscal year have been overestimated by $9
billion.
India's trade deficit for the 2011/12 fiscal year is seen in the range of
$155 billion to $160 billion, he said
Is it possible to buy too much gold?
Interesting question, huh? It seems that all the gold buying in India is
contributing to a balance of payments problem, a current account deficit, and
a currency overvaluation problem. No wonder they raised the import duty on
gold! What's interesting about this situation is that India had a balance of
payments problem back in 1991 with similar symptoms.
This is just some food for thought and discussion, but it's also quite a gold
story! From Wikipedia:
1991 India economic crisis
By 1985, India had started having balance of payments problems. By the
end of 1990, it was in a serious economic crisis. The government was close to
default, its central bank had refused new credit and foreign exchange
reserves had reduced to such a point that India could barely finance three
weeks’ worth of imports. India had to airlift its gold reserves to
pledge it with International Monetary Fund (IMF) for a loan.
The crisis was caused by currency overvaluation; the current account deficit
and investor confidence played significant role in the sharp exchange rate
depreciation.[2] [3] [4] [5]
The economic crisis was primarily due to the large and growing fiscal
imbalances over the 1980s. During mid eighties,
India started having balance of payments problems. Precipitated by the Gulf
War, India’s oil import bill swelled, exports slumped, credit dried up
and investors took their money out.
In mid-1991, India's exchange rate was subjected to a severe adjustment. This
event began with a slide in the value of the Indian rupee leading up to
mid-1991. The authorities at the Reserve Bank of India took partial action,
defending the currency by expending international reserves and slowing the
decline in value.However, in mid-1991, with foreign
reserves nearly depleted, the Indian government permitted a sharp depreciation
that took place in two steps within three days (July 1 and July 3, 1991)
against major currencies.[2]
With India’s foreign exchange reserves at $1.2 billion in January
1991[7][8][9] and depleted by half by June,[9] barely enough to last for
roughly 3 weeks of essential imports,[8][10] India was only weeks way from
defaulting on its external balance of payment obligations.[8][9]
The caretaker government in India headed by Prime Minister Chandra Sekhar Singh's immediate response was to secure an
emergency loan of $2.2 billion[11][12] from the International Monetary Fund
by pledging 67 tons of India's gold reserves as collateral.[1][12] The
Reserve Bank of India had to airlift 47 tons of gold to the Bank of
England[6][7] and 20 tons of gold to the Union Bank of Switzerland to raise
$600 million.[6][7][13] National sentiments were outraged and there was
public outcry when it was learned that the government had pledged the
country's entire gold reserves against the loan.[6][10] Interestingly, it was
later revealed that the van transporting the gold to the airport broke down
on route and panic followed.[1] A chartered plane ferried the precious cargo
to London between 21 May and 31 May 1991, jolting the country out of an
economic slumber.[6] The Chandra Shekhar government
had collapsed a few months after having authorized the airlift.[6] The move
helped tide over the balance of payment crisis and kick-started Manmohan Singh’s economic reform process.[7]
Here's the source of
that fun van story:
"I have a very deep belief that Cabinet posts should be filled with
politicians unless the economy is in serious meltdown, as it was in 1991, when
Manmohan became finance minister," he
explained.
"That was a time when nobody was going to give India any money. People
forget that we had to pawn our entire gold stock. Normally when you have gold
stock, the International Monetary Fund accepts that that gold stock is there,
and gives you money against it. India had to physically move the gold stock
out of India, abroad. I'm informed, by very, very reliable sources, that the
van taking the gold to the airport broke down, and there was total panic."
Desai used this point to illustrate how far India had come economically in
such a short span of time. Now, he argued, India is better prepared to handle
economic downturns, even ones as severe as the current ongoing global
financial crisis.
And then, of course, India bought back its 67 tonnes
(and then some) from the IMF in 2009:
IMF Sells Gold to India, First
Sale in Nine Years
November 3, 2009
The International Monetary Fund sold 200 metric tons of gold to the Reserve
Bank of India for about $6.7 billion, its first such sale in nine years.
The transaction, equivalent to 8 percent of global annual mine production,
involved daily sales from Oct. 19-30 at market prices and is in the process
of being settled, the IMF said in a statement yesterday. The average price to
India, the biggest consumer, was about $1,045 an ounce, an IMF official said
on a conference call. Gold for immediate delivery gained 0.2 percent.
“The fall in the U.S. dollar seems to be pushing all the central banks
to strengthen their portfolio with gold,” said N.R. Bhanumurthy,
professor at the National Institute of Public Finance and Policy in New
Delhi. “Gold is a safe store of value compared to the U.S.
dollar.”
The IMF sale accounts for almost half the 403.3 tons that the
Washington-based lender in September agreed to sell as part of a plan to
shore up its finances and lend at reduced rates to low-income countries.
Asian nations, which have amassed stockpiles of foreign currency reserves
since the 1998 financial crisis, have shown increased interest in
diversifying out of U.S. assets as the dollar loses value against other
currencies.
[…]
Proceeds from the sales and other IMF resources as well as individual
contributors would help pay for discounted interest rates on loans to
low-income countries, the IMF said in July. It plans to grant as much as $17
billion in extra loans to poor nations through 2014. The 403.3 tons the IMF
agreed to sell amount to one-eighth of its stockpile.
“This transaction is an important step toward achieving the objectives
of the IMF’s limited gold sales program, which are to help put the
fund’s finances on a sound long-term footing and enable us to step up
much-needed concession lending to the poorest countries,” IMF Managing
Director Dominique Strauss- Kahn said in an e-mailed statement.
Reserve Management
The gold purchase was done as part of Reserve Bank’s foreign exchange
reserves management operations, the central bank said in a statement on its
Web site today.
India’s foreign-exchange reserves advanced $684 million to $285.5
billion in the week ended Oct. 23, the central bank said Oct. 30. That
included foreign-currency assets of $268.3 billion, gold reserves of $10.3
billion and the special drawing rights with the IMF.
“There seems to be consensus among the central banks that it’s
better to cut down on currency holdings and diversify into assets like gold,
which has upside potential,” Krishna Reddy, a precious metal analyst at
Way2Wealth Commodities Pvt. said in Mumbai. “The Reserve Bank of India
gold purchase is a clear reflection of this belief.”
Today India has 557.7 tonnes of official gold
reserves, valued at more than $30B. Before the 2009 IMF sale it had 357.7 tonnes. India's total foreign exchange reserves now stand
at $296B, ranking it 9th in the world with China at #1.
A Few Thoughts
It occurs to me that Indian savers are saving at full capacity and then some; call it the savings rate ceiling. The problem is that Indians like physical gold. You
don't see much paper gold at those weddings, do you?
Gold demand is generally inelastic in currency terms because
its primary use is as a wealth reserve. This is in contrast to industrial
metals where demand is relatively inelastic in weight terms. In other words,
gold flow by volume should be observed to decline as the price rises while
gold flow by value might remain steady. Yet India's gold intake has risen
from $4.1B in 2002 to $33.8B in 2011. That's an 824% rise in demand in
currency terms at the same time as the price of gold in dollars rose
only around 600%. And this while running a trade deficit:
India's Balance of Trade since 2002
This has to be putting tremendous pressure on anyone working to delay Freegold, assuming such an effort even exists. I guess
it's a good thing there are only 1.2 billion Indians.
Sincerely,
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