For more detail here's Izabella d'Alphaville and FTAV's Man-in-India David Keohane. This is seriously worth a read:
Gold, gold everywhere, not any drop to drink
UBS looks at the fundamentals of India’s new gold monetisation schemes on Thursday and in the process comes up with one of the best summations we’ve ever seen on why gold investing in and of itself is stoopid — especially when done en masse by a relatively poor economy.I know a Pakistani guy who is addicted to Bollywood dance scenes. If I can get a response we'll post music to read about gold by.
Indians directly or indirectly hold an estimated 22,000 tonnes of gold worth USD 800bn or 39% of Indian GDP (banking system credit is c50% of GDP). Gold thus held is problematic to some because unlike most capital goods it derives its expected value not from its ability to produce (directly or indirectly) goods or services that will meet the material demands of consumers. Instead it derives its value from investors’ collective perception of what it is worth.Indeed. Taking real wealth and swapping it for gold, is about as clever as investing in an MMM scheme, for it takes actually useful goods and services and transforms into a mountain of stagnant metal which — unless structured into a factory, automaton or a cancer drug — do absolutely nothing for the real needs of the population.
A country which routinely and pandemically swaps its real wealth into gold thus routinely shoots itself in the foot in terms of missed opportunities to create real wealth.
The only people who benefit from this arrangement are those who got into the gold pyramid game earliest.
With respect to India, the UBS analysts explain, its love of gold has a real macro impact (our emphasis):
Incremental gold demand in India is largely met by imports, with net imports worth 1.7% of GDP in FY15 contributing significantly to the current account deficit of 1.4% of GDP. This means that it could become a strain on the current account during periods of strong demand. This was certainly the case back in 2013, when gold prices collapsed and local market participants rushed to scoop up cheaper metal. The surge in India’s gold imports and the pressure this exerted on the current account deficit prompted the government to react aggressively by introducing changes to the regulatory framework which subsequently curtailed the inflow of gold.There’s an unfortunate paradox to all this as well. Notably, because investing in gold reduces natural wealth and strains a country’s current account, it leads to the depreciation of the country’s currency, which then creates an illusion that gold is in fact a good store of value....MUCH MORE
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Indians purchase gold either for consumption (used in its own right, in the form of jewellery) or as a capital good (in the hope it may be used in the future to, indirectly, fund consumption). Investors hold gold for a variety of reasons: as a store of value, a hedge against inflation and currency fluctuations, as an insurance against uncertainty and tail risks. Capital controls have also arguably played a role for Indians.
