Saturday, October 19, 2013

Is Gold a Problem?

The Indian government has gone so insane over the issue of current account deficit and gold's share in it that they are now taking help of absolutely lunatic methods of filling that gap. The head priest, Shobhan Sarkar, of Uttar Pradesh Unnao temple had a dream of 1000 tonne gold hoard buried under the temple ruins. He saw this dream [sic] because he was troubled by the deteriorating health of the Indian economy - due to widening current account deficit - and wanted to help the Indian government mitigate this problem via this gold hoard. Working on the government's directives, the ASI (Archeological Survey of India) team has started the excavation work few days back. I know the whole situation looks like a dream itself, but sadly the matter is serious (recently ASI has started downplaying the whole matter). In fact, the Unnao temple ruin has become a favorite go to place for surrounding area people and media journalists!

What does this whole situation signify? The way the Indian government has waged a war on gold, it looks like that the hunger for gold of Indian people is responsible for the deteriorating health of the Indian economy; as if gold is responsible for the widening current account deficit. But, as I have wrote in past, rising demand for gold by the Indian buyers is not the cause of poor health of the Indian economy. It is, in fact, one of the signs and a result of already highly inflationary Indian economy. People are buying gold because they want to safeguard their hard earned wealth against rising inflation. And this inflation is not created by gold buyers themselves! RBI (Reserve Bank of India) is wholly responsible for this inflation. RBI is printing and creating money out of thin air since its inception, and that is inflation. What people are doing is only protecting themselves against this central bank and government depredations; people are just reacting to this situation. It is government's habit to always blame the public for their own shenanigans, and the same is happening in India.

We also need to understand that gold itself is not important for the better health of the economy. It is important today because it is money whose purchasing power no central bank or government can easily dilute. Gold, in its monetary role, is just a common medium of exchange, and we demand it only to use it later on for purchasing those goods which we ultimately want to consume. No one is demanding gold for its own consumption. Even if the ASI team finds the 1000 tonne gold hoard, that itself won't solve the problem of current account deficit once and for all. Deficit is widening because of RBI's inflationary policy. As long as RBI is creating inflation by creating money out of thin air, inflation, CAD deficit etc., problems are going to remain with us. At the most, that 1000 tonne gold hoard can kick the CAD deficit can down the road to some distance, but it won't cure it totally. Only when RBI stops its inflationary policy and government starts rolling back itself, the Indian economy can recover and progress again.       

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