Gold’s Protective Power In Action: India’s Ongoing Currency Destruction

The following is an excerpt from Grant William’s latest letter. In Things That Make You Go Hmmm he writes about the currency debasement in India. Although the Indian currency has been falling against the dollar for four decades now, it certainly is in an accelerating downtrend lately. What happens with purchasing power of currency in such a situation and how to protect against that type of destruction? There is only one answer: own the alternative currency that central planners cannot create out of thin air.

The following paragraphs, quotes and charts paint a picture of a country desperately trying to save its economy and currency. The victims of this situation are of course the citizens. In their attempt to run to gold, they are stopped by their own government. How ironic is this situation when looking as an outsider. Did you ask yourself: am I prepared if this situation hits my country? In this global currency war, that just started two years ago and is expected to last till at least 2020, every country will be hit sooner or later. Are you prepared?

Indian demand for physical gold swamped even Chinese demand in Q2 2013, as Indians stocked up on the monetary metal not only in the form of jewelry ahead of the traditional wedding season but also in investment form: coins and bars. All the while, their national currency, the rupee, was disintegrating before their eyes.

In the absence of monetary mettle, Indians demanded monetary metal.

Between May 1st and August 20th, the rupee fell 20% against the US dollar, and whilst that move may not have resonated with most Westerners, it certainly did with India’s richest man:

(UK Guardian): India’s richest man is down to his last $17.5bn (£11.2bn), after the plunging value of the rupee wiped out a quarter of his fortune, in dollar terms.

Mukesh Ambani, the chairman of Reliance Industries, which operates the world’s largest oil refineries, has lost $5.6bn of his personal wealth since 1 May, according to the Bloomberg Billionaires index.

His fortune took a further hit on Thursday, as India’s currency hit fresh lows, adding to the sense of panic in emerging markets. Developing economies, excluding China, have seen an outflow of $81bn in emergency reserves since early May, as central banks try to prop up their currencies.

That’s a very real hit, but Indians are used to moves like these in their currency, though the trend over the last 40 years has been largely a one-way ticket to a weaker rupee:


Source: Bloomberg

However, that chart tells only half the story. To really understand why Indians covet gold so much, let’s take a look at another chart, this time showing the recent performance of the rupee AND gold:


Source: Bloomberg

Et voilà! Since April, gold has strengthened 20% in rupees whilst the currency has depreciated by a similar amount vs the US dollar.

Purchasing power protection in action, folks. Just one of the beauties of owning gold.

Naturally, the Indian government is concerned that its citizens — conditioned over the centuries to understand exactly why owning gold is important ­— are exchanging their rupees for gold in droves, because their activity is exacerbating the slide in the rupee. So…

Cue capital controls:

(The Times of India, Aug 14 2013): India has banned imports of gold coins and medallions as part of steps to curb its current account deficit, Arvind Mayaram, economic affairs secretary, said on Wednesday, after total gold imports picked up again in July.

The federal government will take more steps to stabilize the rupee as and when required, he said, adding the current measures were not permanent in nature …

As drastic as the government’s action may seem, it is just the latest in a long line of (futile) attempts to curb Indian citizens’ ability to own gold:

(Reuters): Following are the measures taken by the central bank and the government in 2013:

Jan 21 – The government raises the gold import duty by 2% to 6%.
Jan 22 – The government more than doubles the duty on raw gold to 5%.
Jan 30 – Finance Minister P. Chidambaram says there are no plans for additional taxes or curbs on gold imports.
Feb 1 – The Reserve Bank of India (RBI) plans to introduce three or four gold-linked products in the next few months.
Feb 6 – The RBI says it would consider imposing value and quantity restrictions on gold imports by banks.
Feb 14 – The central bank relaxes rules on gold deposit schemes offered by banks by allowing lenders to offer the products with shorter maturities.
Feb 20 – The Trade Ministry recommends suspending cheaper gold jewellery imports from Thailand.
Feb 28 – India keeps its gold import duty unchanged in its annual national budget, defying industry expectations.
Feb 28 – India proposes a transaction tax of 0.01% on nonagricultural futures contracts, including for precious metals.
March 1 – The Finance Minister appeals to people not to buy so much gold.
March 18 – The Reserve Bank of India says it is examining banks that sell gold coins and wealth management products to identify “systemic issues”, with a view to closing any legal loopholes.
April 2 – The Finance Ministry suggests it is unlikely to raise the import tax on gold further to avoid smuggling and would instead introduce inflation-indexed instruments.
May 3 – The RBI restricts the import of gold on a consignment basis by banks.
June 3 – The Finance Minister says India cannot afford high levels of gold imports and may review its import policy.
June 5 – India hikes the gold import duty by a third, to 8%.
June 21 – Reliance Capital halts gold sales and investments in its gold-backed funds.
June 24 – India’s biggest jewellers’ association asks members to stop selling gold bars and coins, about 35% of their business.
July 10 – India’s jewellers announce they might continue a voluntary ban on sales of gold coins and bars for six months.
July 22 – The RBI moves to tighten gold imports again, making them dependent on export volumes, but offers relief to domestic sellers by lifting restrictions on credit deals.
July 31 – India hopes to contain gold imports well below the 845 tonnes that were shipped last year, the Finance Minister says.
Aug 13 – India hikes the import duty on gold for a third time in 2013, to 10%. Duties for silver and platinum are also increased to 10%. The customs duty on gold ore bars, ore, and concentrate are increased to 8% from 6%.
Aug 14 – India turns the screws on gold buying again, banning imports of coins and medallions and making domestic buyers pay cash.

Get the feeling that in the middle of the world’s largest democracy, a small group of people doesn’t want a large group of people owning something?

Now, naturally, Indian citizens, seeing their government’s desire to restrict their ownership of gold, simply stepped up their pursuit of gold dramatically:

(Mineweb): Even as gold retailers reel under new RBI curbs, gold smugglers appear to be gaining ground in India. The seizure of smuggled gold has surged 365% in the April to June quarter of this financial year, thanks to the incessant restrictions on the precious metal. Margins for smuggled gold have also jumped, beating other smuggled items like sandal wood and ketamine drugs….

Revenue authorities had said smuggling could rise to over 150% over last year. However, the increase in import duty in June, from 6% to 8% as well, as the Reserve Bank of India’s (RBI’s) recent measures to curb gold imports have precipitated smuggling.

The Wall Street Journal shed some light on just how big the gold smuggling business is in India — and just how little of it gets detected:

(WSJ): The number of people arrested by the department for gold smuggling rose to 32 in the quarter that ended in June from four during the same period a year earlier, according to the Revenue Intelligence official.

The value of the gold seized during the quarter was 270 million rupees, more than 10 times the 25 million rupees of precious metal retrieved from smugglers during the same period in 2012, said the official.

The total number of cases of smuggled gold during the same period shot up to 205 from 21 a year earlier, said an official at the Antismuggling Department, part of the Central Board of Excise and Customs.

But this is only a fraction of the gold being smuggled into the country, Revenue Intelligence officials say. “I think we are able to detect only about 5% to 10% of the gold smuggling in the country,” said a second Revenue Intelligence official.

As I said previously, people in the East fundamentally understand the value of owning gold — and not being able to get it just makes them want it more.

Receive these articles per e-mail

Subscribe for the free weekly newsletter and receive 3 papers about physical precious metals investing