n a fascinating 60 Minutes report, correspondent Byron Pitts documents India’s cultural affinity with gold but ends up making the dubious assertion that the country’s thriving precious metals market is driving record gold prices. See the report below:
Though it goes back and forth with China, India remains the top gold consuming country in the world. As the report shows, gold is incredibly important for the business of arranged marriages. Families begin accumulating the metal for their young as an investment in their future wedding prospects. But Pitts jumps to the brazen conclusion that, “people in the West can think what they want. The folks in London can set prices as much as they want. What happens in India is what determines what happens with gold.”
Obviously Pitts hasn’t a clue as to the value and use of gold in a global economy wrought with continual inflation and monetary debasement. Even in a country like India which has 21 official languages, gold is universally recognized as valuable. That fact speaks volumes of the precious metal’s use throughout history. Writing in Gold, Peace, and Prosperity, U.S. Congressman and current presidential candidate Ron Paul notes why gold makes the perfect money and store of value:
Gold is scarce; it is portable; it is easily divisible; it is durable; it is desirable for non-monetary purposes; and it is impossible to counterfeit.This is why gold was the market’s choice as money for thousands of years before the advent of government imposed fiat currency. To claim, like Pitts does, that India affinity for gold drives the world’s market without making a peep about central banks shows a real lack in education of history and economics. Though the cultural attraction for gold has been ingrained in India for a long time, this hardly explains the run-up in gold prices over the past decade. What Pitts doesn’t reveal is that India’s government has been engaging in the nasty habit of rupee (India’s currency) debasement for almost half a century, via Business Today:
In early controlled exchange rate regime, the rupee exchange rate hovered around Rs 4 in the 1950s, Rs 5 in the 60s, Rs 7 in the 70s, and Rs 8 in the 80s. The liberalized era of 90s was different, the rupee moved in the Rs 20s (the rupee was also partly decontrolled in early 90s) and Rs 40 in the decade of 2000.
Not to forget two major devaluations by the government in between. The rupee was devalued first in 1966 by a massive 60 per cent from Rs 4.76 to Rs 7.50 against the US dollar. Twenty five years later in the 90s, the rupee was again devalued by 20 per cent from Rs 20.5 to Rs 24.5 against the US greenback.
The reasons for the two devaluations were not too dissimilar; twin deficit (current account and fiscal), soaring inflation, insufficient foreign exchange reserves, and the developed world demanding decontrol and liberalization to allow them to do business in India.You can see the devaluation compared to the dollar below:
What may have been a simple cultural fondness for gold has more than likely become a desperate attempt to obtain some store of value in light of the heavily used government printing press. Just a few days ago, the rupee was devalued yet again:
The Central Bank (CB), as the Sunday Times reported last week, is changing tack in its foreign exchange management direction and allowing free market forces to operate. Soon after depreciating the Rupee by 20 cents on Friday, February 3, the authorities have been pushing down the local currency against the US dollar this week and limiting its intervention compared to wide-scale pumping in of dollars in the past year.Keep in mind, this decision was justified as the inflation rate fell to an annual rate of 6.5%. This is the lowest level the country has seen in two years amidst a global recession. With such a history and tendency toward currency destruction, India’s attraction to gold will not only continue but will become much more difficult to maintain for those on the lower rungs of receiving newly printed rupees. With central banks all over the world ready to open the monetary spigots yet again, Pitts and 60 Minutes have a lot to learn on the barbarous relic’s true use outside jewelery and wedding collateral.Like witty investor Jim Grant says,
The people of India have long realized the metal’s protective qualities against central banking debauchery and counterfeiting. Why can’t the supposed “enlightened” media establishment?“To me the gold price takes the form of a very uncomplicated formula, and all you have to do is divide one by ‘n.’ And ‘n’, I’m glad you ask, ‘n’ is the world’s trust in the institution of paper money and in the capacity of people like Ben Bernanke to manage it. So the smaller ‘n’, the bigger the price. One divided by a receding number is the definition of a bull market.