Gold: The Greatest Confiscation of Wealth in History

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First India wages a war on cash. Next, the government is priming the people to hand over their gold.

Eight months on from the demonetisation experiment that crippled the country, the Indian government are trotting out another, similar policy.

The demonetisation experiment I’m talking about happened in November last year, when India’s President Narendra Modi effectively declared war on the country’s cash economy. Modi said it was a crackdown on the black economy. They were targeting people who didn’t pay taxes. And other types of people that hoard cash scored from nefarious deeds.

That was a nice front. However, it was really nationwide coercion program, to force people into the ‘modern’ financial system.

Of course, India’s government doesn’t use those words. They call it ‘improving financial literacy’.

That month, Modi made an unscheduled announcement, declaring that all 500 and 1,000 rupee (AU$10.21 and AU$20.43) notes will no longer be considered legal tender as of 8 November. All current notes in circulation were required to be deposited in banks by the end of December 2016.

Once people handed their money over, banks would replace the banned notes with new 500 and 2,000 (AU$40.86) rupee notes.

The move nearly crippled India. The Modi government effectively removed 86% of notes from circulation, from the 90% of the population that were reliant on cash. People would queue for hours out the front of banks to swap the now-illegal notes over for the new ones.

In spite of the project, rumored to have been planned for 6–10 months prior, ATMs weren’t capable of dispensing the new notes. It took two weeks for the majority of ATMs to be updated to accommodate the new notes. Even then, the cash machines ran out of money within a few hours each day.

However, people had no choice. They had to replace the old notes. Anyone caught ‘transacting’ with the old notes would face a 10,000 rupee (AU$204.38) fine. Or five times the value of the notes that were found. Whichever was higher.

Unsurprisingly, much of the old money found its way into gold.

The Times of India pointed out that, while the good people of India are dutifully handing over the notes, the ‘bad’ people of India are finding ways around the new mandate by loading up on gold.

When the announcement from Prime Minister Narendra Modi was made, goldsmiths in certain parts of the country loaded up on gold…and waited. In the 12 hours that followed the announcement, goldsmiths and jewellers alike opened their doors — in some cases until well beyond midnight — and accepted very large cash transactions, including the newly declared ‘illegal’ notes.

The average for the night was 37,000–38,000 rupee (AU$724–743) for 10 grams of gold. This was well above the Indian going rate of 30,000 rupee (AU$587). Rumour has it the price spiked as high as 48,000 rupee (AU$939) for a short time.

Eight months on from the worst financial experiment this decade, and the Harvard Business Review recently wrote that any impact this had on corruption is yet to be seen. They explained most criminals don’t keep their assets in cashing, saying:

When corrupt people need places to park their ill-gotten gains, cash normally is not at the top of their list. Only a tiny proportion of undeclared wealth is held in cash. In an analysis of income-tax probes, the highest level of illegal money detection in India was found to be in 2015–2016, and the cash component was only about 6%. The remaining was invested in business, stocks, real estate, jewellery, or “benami” assets, which are bought in someone else’s name.

Which might be why the Indian government is now making a play for people’s gold.

Of course, that’s not what they are calling the theft. Don’t be silly. This time, it’s about assisting people to earn a return on any ‘useless’ gold sitting around the house.

Bloomberg writes that the Indian government is going to set up a ‘gold exchange’, writing:

The start of a spot bullion exchange, to make gold supply more transparent and help enforce purity standards, is under consideration, the people said. An import tax of 10 percent could also be reduced as the government seeks to eliminate smuggling, they said. The plans also include a dedicated bank for the jewellery industry, according to one of the people.

TThe overhaul of India’s disorganised and fragmented gold jewellery industry is meant to bolster confidence among consumers, where the gifting of gold at weddings and festivals or its purchase as a store of value are deeply held traditions. Ensuring quality standards and allowing supply chains to be easily tracked are ways to enhance trust.

So important is accumulating gold in Indian families that the FICCI gold survey said families allocated 8.13% of their annual budget to accumulating the previous metal. That ranks ahead of the 7% allocated for discretionary items like clothing or linens for the home.

How much more confidence does India need when it comes to their gold? It’s estimated that people privately own up to US$1 trillion (AU$1.31 trillion) of gold in their families. Clearly the country has complete faith in their own gold market.

And that’s the zinger. There is over one trillion in ‘wealth’ locked up in private families, greedily hoarding their precious metals away from the government.

In fact, the FICCI Gold Survey says that, ‘If a small percentage of this gold were monetised, the economic and fiscal impact would be considerable.

The gold exchange is just one attempt to monetise the private wealth within in the country.

Back in November 2015 — almost exactly one year to the date the 500 and 1,000 rupee notes were banned — the government offered the people the chance to loan their gold jewellery to a bank, and earn interest on it. The Indian government even promises to return gold or the ‘cash value’ back at the end of the lease.

Only a fraction of the gold in the country found its way into the Indian banking system.

Yet, it’s still not the first time India has chased private wealth.

In 1999, the State Bank of India (SBI) tried to create a similar ‘interest for gold’ reward system. The problem was, the minimum deposit had to be 500 grams. Again, only a fraction of gold landed in the hands of the SBI.

Remembering this failure, Modi lowered the minimum amount to 30 grams (a troy ounce is 31.10 grams).

Politicians across India have suggested the gold for interest offer is failing because banks, financiers and jewellers aren’t bringing it to customers’ attention. I’d argue it isn’t working because people see through the government’s thinly veiled attempted to seize personal wealth.

The Indian government is attempting to ‘legitimise’ a market that doesn’t require regulation. The gold market operates effectively within the country. And it doesn’t need government support to ‘oversee’ and ‘regulate’ it to make it appear more ‘trustworthy’.

Those words are just a load of hooey. Ultimately they mean nothing more than controlling, regulating and confiscating gold from the people.

Don’t believe for a second that the Indian government are doing this to prevent criminal activity. Or that the gold market requires a trustworthy government eye.

Words like this are manipulative.

Having already stamped out high denominations, what the Indian government is doing here is part of a bigger scheme. And that’s to force people into the banking system in greater numbers than ever before.

It bothers me, and it should bother you. This corralling of wealth is happening right before our eyes. This isn’t scaremongering. It’s a very real threat, and it’s happened before.

People often talk about Roosevelt’s personal gold confiscation program in 1933. When they speak about it, they carry on as if we are too smart to let that happen to us again.

We are smarter. Smarter about gold theft, that is. But can you see what is happening?

Limiting or stopping large denominated notes is the first step to what I believe will be the greatest confiscation of wealth in history.

Right now, the lie is that reducing large notes will benefit you by limiting criminal activity. This move isn’t about preventing corruption or ending black market activity. People who engage in illicit activity will always find a medium of exchange that works for them.

But for you, the good citizen that toes the line, it’s very different. Once you have all your wealth locked into nothing more than binary code, inflicting negative interest rates and inflation upon the public is easy.

So let’s call this what it is. We understand exactly what the Roosevelt government did eight decades ago. It gobbled up all the private wealth from Americans and revalued the gold price from US$20 to US$35 an ounce — which at the same time devalued the US dollar by 75%.

Unlike last time, though, we have advance warning that this is happening.

Kind regards,

Shae Russell,
Editor, Strategic Intelligence

About Shae Russell

Since starting out in the financial markets over a decade ago, Shae has extensive experience across various aspects of the industry. Shae cut her teeth in the derivatives industry, teaching clients basic trading techniques with technical analysis.

Joining Fat Tail Investment Research eight years ago, Shae has worked across a…

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