Gold Demand in India Surges as Large Rupee Notes Lose 30% of Face Value

by J.P. Buntinx

Although the gold price is dropping, there is renewed interest in precious metals originating from India. Thanks to a governmental decree that makes several banknotes virtually worthless, investors and consumers are looking for other solutions. That sparks an interest in gold.

Gold Demand in India Surges as Large Rupee NotesWhen investing in safe haven assets, there are few viable choices. Government bonds and stocks are not all that appealing, and foreign exchange investments are a significant risk. Gold and other precious metals remain a favorite, even though the margin for significant gains is shrinking rapidly.

The Indian government has decreed that large rupee banknote denominations are effectively useless. It made the vast majority of currency in circulation in the country illegal, a worrisome development. The government wants to clean up corruption, but this may not be the right way.

Indians flocked to gold once the news broke. People were willing to pay premium prices to get rid of their rupee savings, and some paid over $2,250 per ounce, almost twice the current market price.

Despite this sudden interest by Indians, the gold price is down. Gold futures have dipped below $1,300.

Despite the push to end corruption in India, the adverse effect is already noticeable. The illegal bills can still be redeemed for 70% of their face value, which shows how broken the financial system is. Moreover, places where these bills are still accepted for their real value are turning into illegal currency exchange spots.

The Indian market may not recover, and the surge in gold demand is a way to hedge against future instability.

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