Buy Silver — May Replace Gold as Money in India
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.
Indians’ 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.