For the last one year government is spreading a message that gold is the cause of all problems for India.
They hiked import duty, asking banks not to deal in gold, trying to make people feel guilty about owning gold. Chidambaram recently asked people to avoid gold.
People in government may be breaking their heads on how to get out of the mess.
I am neither an economist, nor a policy maker.
That’s why I think out of the box and this crazy idea came !
If government is really so serious, why don’t it sell its own gold from the reserves? After all it is the world’s 10th largest hoarder of gold. May be many people will simply smile at this idea as a nice joke and move on.
Lets think of it. What happens if government starts selling its gold?
1) Demand will subside. How?
Every Indian owns gold but in small quantities for marriages/festivals. But major part of the demand is in investment. If government starts selling gold, the prices will go down which will discourage ‘investments’.
Government keeps its foreign reserves in both cash (USD, Euro, GBP, Yen) and gold. Just like it is interfering in dollar market (to reduce wild fluctuations), it can sell when gold goes up. It keeps prices in check which will kill ‘investment’ demand.
The genuine demand like from poor people who buy during marriages / festivals will be happy if prices stay low. This way bad guy gets punished and there will be support for the good guy.
2) Will Government loose if it sells its gold? No. How?
The last price paid by government to buy gold was 1000 USD per ounce. Earlier it was even lower. Even if it sells now at 1200 USD per ounce, it is not making any loss.
3) Bridge gap between government income and expenditure (CAD, Trade Deficit etc). How?
Government is selling PSU stocks to finance its deficit. Sale of gold will widen its choice of sale.
4) Support to rupee. How?
As investment demand goes bust, India’s imports gets reduced to only what is really required for common people, its trade deficit goes down, which in turn supports the currency.
So summarizing all the points, by selling gold or even showing willingness to do so, govt is accomplishing the below :
- It is not only professing its dislike of gold, but actually practicing.
- It is helping genuine people in keeping gold prices low, but discouraging gold as investment.
- It is booking some profits on its assets.
- Helping itself in bringing in some relief money for its CAD.
- Support the currency.
Like I said previously, I am not an expert or an economist to understand the finer nitty-gritties of this, but this thought came to me and I have put it out there. Would be great to hear your comments on this.
[This guest post has been contributed by our regular reader Altaf Rahman]