Why Indians are Hiding Their Gold from their Government

India’s Prime Minister, Narendra Modi, is after his country’s wealth.

Not the visible wealth, though. He’s after the hidden, shiny stuff only families know the whereabouts of.

I’m talking about India’s estimated US$900 billion (AU$1.17 trillion) of privately-owned gold stashed in family homes and temples.

In the past 16 months, Modi has been trying to encourage citizens to deposit their gold jewellery at the bank to earn interest. But the people are smart, and they see right through this ploy.

To date, only six tonnes of gold has found its way into the financial system to earn interest. This is out of 24,000 tonnes the World Gold Council estimates is privately owned in India.

To put that incredible figure in perspective, India’s central bank holds 557.77 tonnes of gold. The Reserve Bank of Australia has 79.85 tonnes of gold. No, I didn’t leave off any zeroes.

Because we lack an understanding of gold, there are no estimates about how many Australians own gold privately.

The Indian banks have been left reeling after so few people decided to store their gold at banks to earn interest.

The argument from the Indian government is that banking the gold will help people earn an income on the ‘useless metal’. However, this feels suspiciously like yet another attempt to draw people into the financial system, only to digitise their assets once they’re in.

You see, in order to receive the interest, you have to have a bank account. At present, only 53% of the Indian population has a bank account. And 43% of those accounts are dormant. Compared to other, more developed economies, which have a dormancy rate of 5% according to the Organization for Economic Cooperation and Development (OECD), that figure is extraordinarily high.

The first step to forcing people into the banking system was banning the use of 500 (AU$9.90) and 1,000 (AU$19.81) rupee notes. In late November 2016, Modi declared that, effective immediately, 500 and 1,000 rupee notes would no longer be considered legal tender. The problem was that the new bills weren’t compatible with ATM machines. It meant that this cash-reliant economy operated for weeks with old notes that were worthless and new notes that were not widely available. Banks also capped the amount of ‘cash’ they would exchange on a daily basis, creating a widespread cash shortage. For the small percentage of the population with bank accounts — and money in them — ATMs were limiting just how much money was issued per account every day.

The smart money hid the wealth in gold. In the hours after the announcement, 10 grams of gold was going for 52,000 rupees (AU$1,030) — double the normal rate.

At the same time, the Indian cash-ban enabled the government to see how much tax they’d been missing out on, as much of people’s wealth isn’t declared.

It’s why this ‘interest for gold jewellery’ concept is a farce. Anyone who places their gold in this facility to earn interest automatically lets the government know the amount of hidden wealth they have. That enables the Indian government to find a way to tax it.

This is why I like gold. No one but you needs to know how much you have.

Kind regards,

Shae Russell

Shae Russell started out in financial markets more than a decade ago. Working with a derivative brokering firm, she helped clients understand derivative markets, as well as teaching them the basics of technical analysis. Since joining Port Phillip Publishing eight years ago, Shae has worked across a number of publications. She holds the record for the highest-returning stock recommendation, in which a microcap stock returned over 1,200% in six months. Ask her about it, and she won’t stop yapping on. For the past two years, Shae has worked alongside Jim Rickards as his Australian analyst, translating global macro trends for Aussie investors, and how they can take advantage of these trends. Drawing on her extensive experience, Shae is the lead editor of Markets & Money. Each day, Shae looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

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