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Gold curbs and restrictions are patently bad


Browsing through many forums I am stunned and shocked to read many people advocate gold curbs and like. It shocking and it’s clear these people do not understand the intricacies of economics. They have just taken the Chidambaram-MainstreamMedia story hook, line and sinker about gold being the evil of everything bad happening right now. It’s an easy ploy for government to blame gold for the huge current account deficit but do these supporters really understand the repercussions of such a curb?
Or a more pertinent question is do they really understand the repercussions of the curb on the common people of India?

Looks like Chidambaram and government has effectively brainwashed large numbers of people to see gold as an evil perpetrator even to the extent to look into tapping the temple gold, jewellery and assets.

People who know monetary economics know how futile it is to acutally curb a supply of a quasi-currency in order to boost the value of another currency. A small explanation (for the sake of it) is: curbing the supply will only lead to rising prices hence attracting lot more investments into it at higher (destructive) prices than necessary, and all this in defence of a currency which will steadily loose value against restricted-currency! (which being the reserve and part of networth will overshoot the equilibirum values to the extent of creating arbirtage opprotunities againsst other currencies, finally bringing the non-restricted currency in equilibirum to the restricted-currency (gold), and you have ended up exactly where you started off with but with lots of wealth destruction in the middle!** Not to mention other cascading effects. I can’t fathom how this can be a good deal. I am sure Chidambaram, being one the smartest guys that he is, knows very well this idea is hogwash.

A better question to ask these people would be HOW will the gold curbs help Rupee or whatever else they are after. The first obvious answer most seem to know is that it will help reduce current account deficit. We can ask two more questions at this juncture, 1) Will the reduction in current account deficit be enough? And 2) How will crubing gold imports affect the demand and its consequent supply, and how will it affect the inflation and monetary/ wealth rebalancing? I would like somebody from these supporters to step forward and answer this.

**Perhaps an easier analogy (though not perfect) to understand it is to view it as government created gold-boom. [More the government restricts supply in the wake of good demand, more the asset would boom, more it booms in the environment of sociental and inflationary concerns more it will overshoot.] you can already see this happening with gold prices shooting up from 24000 levels to 35000levels, all the while when government were rising taxes and putting import curbs/ restrictions on public sector banks and bullion dealers.

We could go on and on and on, giving many examples, data, charts and history, and the gold-curbers won’t be able to go beyong “reducing CAD.”

Its high time people wake up and realise gold is a necessary investment startegy for vast majority of Indians, and curbing that demand artfocially will only encourage slippages (smuggling / black money) while it does nothing to the official economy than score a few brownie points for the populist ridden government.

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