Buy Silver — May Replace Gold as Money in India

by Mark O’Byrne

The Indian government has been trying to reduce its citizens’ demand for imported gold as part of a wider crackdown on currency used in the black market that includes the withdrawal and replacement of its two largest-denomination bank notes. The strategy will likely have some unintended consequences.

Buy Silver — May Replace Gold as Money in IndiaIndians’ famous love for gold has created serious and ongoing economic issues for the nation. In 2011, Australian investment bank Macquarie estimated that 78% of India’s household savings were held in gold.

In effect, this means that India has a dual currency system where people choose to save mostly in gold rather than rupees. This is unlike any other major economy and begs the question: How do you wean a population off a precious metal?

The author discusses how saving in gold rather than bank deposits creates a permanent drag on India’s growth and the unintended consequences, and concludes that even a small substitution from gold to silver would result in a massive increase in the price of silver. A 10% reallocation from gold jewelry investment to silver in India would nearly double world silver jewelry demand. Mines and other sources would not be able to fill the gap immediately; prices would rise, further fueling demand and creating a new, shiny headache for those trying to marshal India’s unusual economy.

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