Larry commented early and often about the desire on the part of governments everywhere to transform us into a cashless global economy. Making it easier than ever to track – and tax – every single transaction anyone makes, anywhere on earth, right down to the last penny.
Intellectual heavyweights, including economists Joseph Stiglitz of Columbia and Harvard’s Ken Rogoff, have long trumpeted the virtues of a cashless society, abolishing cash in favor of a digital currency.
Rogoff has argued that too much cash simply contributes to an underground economy and that large-denomination bank notes should be retired.
India’s government listened.
You may recall that late last year, India took radical action to de-monetize its economy, by withdrawing the equivalent of $220 billion worth of currency from its economy in one fell swoop.
In November, the government announced that 500- and 1,000-rupee bank notes would be abolished. They also capped the value of older currency exchanged at banks, and they curbed withdrawals from individual bank accounts and ATMs all across India.
It was all done to help purge India’s economy of “black money” and crack down on tax evasion. Ken Rogoff must have been pleased.
India is a highly cash-based economy, with nearly 80% of transactions paid for in cold hard cash, compared with just over 20% of transactions in the U.S.
A total of 15.4 trillion rupees was sucked out of India’s financial system almost overnight. That’s equivalent to 86% of all currency in circulation!
Think about the impact that would have here at home on American consumers.
Of course, the predictable result was a shock to India’s financial system and a severe liquidity squeeze that hammered consumer confidence, sending India’s entire economy into a fourth-quarter tailspin.
An innocent bystander in India’s cashless crusade was demand for gold. In fact, gold imports by India slowed sharply in December, with overall purchases in 2016 slumping to the lowest level in seven years.
And since India is the world’s second-biggest consumer of the yellow metal after China, gold’s 10% decline in the fourth quarter of last year is due in no small part to India.
The good news: The currency shock to India’s financial system from going cashless appears to be over.
Banks are flush with cash again, giving a lift to lending…
A recent wage increase for India’s government employees and pensioners is boosting consumption, and …
India just enjoyed a bumper agricultural crop, after the best monsoon season in three years.
What does this mean for gold?
India’s demand for the yellow metal is likely to rebound with a vengeance. Even with restrictions in place on the amount of gold that can be purchased, Indians will just buy smaller amounts more often.
Or they will simply shift a large part of their gold purchases underground, spurring growth in India’s black market for gold, and beating the government at its own game, exactly as Larry predicted.
The World Gold Council conducted a survey last year in which two-thirds of respondents in India agreed with the statement: “I trust gold more than the currencies of countries.” And 73% of those surveyed agreed that: “Gold makes me feel secure for the long-term.”
Bottom line: As global governments marginalize their paper currencies in a misguided quest to go cashless, the more demand there will be for the ultimate hard currency, gold.
The SPDR Gold Trust ETF (NYSE:GLD) fell $0.52 (-0.45%) in premarket trading Friday. Year-to-date, GLD has gained 4.43%, versus a 5.96% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of Money And Markets.