Friday, November 30, 2012
Wednesday, November 28, 2012
Over the last few months, coinciding with the time Chidambaram took over as Finance Minister, there is an increasing lobby calling out for curbing gold imports into India. 60 billion dollars of India's annual import bill is due to importing gold. One of the ways of shoring up the domestic currency is of course to discourage dollar outflows arising due to imports. Subir Gokarn, deputy Governor of RBI seems to be at the forefront of this campaign – he can be frequently seen deploring the love of Indians for gold, and exhorting banks to come up with innovative schemes to divert this money into some innovative schemes 'linked to gold'.
It is being reported that finance ministry mandarins and bankers are considering introducing 'gold linked deposits / schemes' where people can invest in financial products whose price will vary with the price of gold. Whether the underlying investments of the scheme will actually be in physical gold is hard to guess. What the government really wants to do is to pander to Indians' appetite for gold – it knows it can do nothing to curb that – while at the same time appropriating the money for its own uses.
The financial industry seems to have taken this cause up with enthusiasm. There is suddenly a spate of learned articles appearing in dailies extolling the virtues of investing in 'fictional derivative' (the term is entirely mine, they never use it) products linked to the price of gold. To those who followed the 2008 financial meltdown, this could evoke a sense of déjà vu. Synthetic credit default swaps, anyone?
Of the approximately 2400 tons of gold produced worldwide annually (of which India contributes a negligible part since India never produced gold in any significant quantities), India imports about 800 tons every year. Indians' appetite for gold dates back to ancient times when India imported gold and precious stones in exchange for spices exported out of the country. It is estimated that one-third of all gold ever mined and existing above ground – i.e. one-third of about 160,000 tons – is resident in India.
Gold while being intrinsically useless – it has no utilitarian value worth talking about – has always been considered a very good investment. The primary reasons are: it is scarce thus preserving demand, it is 'dense' thus taking up very less space, it does not react with most chemicals or corrode thus preserving value over time, it can be easily divided into small pieces or melded into large ones, and it has value around the world and has been considered valuable through the centuries. All qualities that made it ideal currency material till the governments of the world conspired to move away from the unsustainable (to the profligate) gold standard. Indians have always understood this instinctively – you don't need to hold a class to explain all this to the most illiterate villager. She understands the value of gold, and does not get swayed by specious arguments against it, smart woman!
Witness what happened when Morarji Desai, then finance minister, tried to place restrictions on Gold in 1963 following the India China war. The Gold Control Act, 1962, banned gold loans given by banks, banned forward trading in gold, and banned production of gold jewelry above 14 carat fineness. This did not have any significant impact and was followed by the Gold Control Act, 1968, which prohibited Indian citizens from owning gold in the form of bars and coins! Goldsmiths were not allowed to hold gold more than the bare minimum required to make jewelry. Did the demand for gold drop due to these measures? Not at all. It is estimated that about half of India's imports in those days were of gold! This is about the time when smugglers became the new badshahs. Those who grew up in the seventies will remember the Hindi films where the hero entangles with crooks landing contraband gold on a suitably desolate coastline. Moral of the story? It is easy for governments to control imports of elephants. But it is somewhat more challenging when it comes to a commodity like gold!
The US has also had its fling with banning gold. In 1933, the Roosevelt government made it illegal for private citizens to hold gold, and ordered them to hand over the gold they had to the government. The measures met with a little more success in the US than in India, but then they are not genetically wired the same way as Indians; in fact I would go further and say that US citizens are more naïve and prone to accept things at face value! It also goes to show that governments are wary of gold in private hands – no institution likes power being distributed widely in so many hands that it cannot exercise control over.
What has been the performance of gold recently as an investment? In the last five years, gold has increased 200% in value while the sensex has dropped 6 percent. While this need not always be the case, and one needs to take a longer term view, it is true that gold is at the very least guaranteed to protect your money against inflation. And against debasement of the currency which is a real risk nowadays with all governments indulging in a race to the bottom, by printing more notes.
Real estate and gold are the two things one can physically control, without other people determining their fate. By gold in this context, I mean gold held physically by you in your own hands. What is to prevent governments from commandeering all gold and giving you currency notes in return under the excuse of a real war or an imagined crisis? I am not wishing to sound alarmist here, but historically that has happened. Of the two, gold is more easily 'hideable' and transportable than real estate, thus making it ideal for holding against extreme eventualities.
As to 'gold linked derivative' products, I have no faith in them. The total outstandings of such products out there in the market are far more than the actual quantity of gold available. Also, financial instruments, whatever the underlying may be, and whoever the guarantor may be, are prone to default or expropriation.
It is good to continue holding gold for a certain proportion of your net worth. Gold in physical form. In your own custody. Not as a financial instrument. But then, if you are an Indian, I don't have to belabor that point. You understand that instinctively, don't you?
Monday, November 12, 2012
A recent news item talks about how authorities in Los Angeles are thinking of introducing a legislation mandating that porn stars should wear condoms in their movies! While I am sure wearing condoms is a good thing, maybe this is a case of taking things a bit too far. Or, at a deeper level, it is what happens when we let Big Brother take over all aspects of our lives. Big Brother in this case is convinced that HIV and AIDS are a menace that need to be controlled (no arguments there – except that worldwide they anyway seem to be more under control now than a decade back), and that wearing condoms helps prevent the spread of AIDS (better than advocating complete abstention at least). So far so good.
Then is where it begins to get interesting. Big Brother – in this case whoever is the competent authority in the city of Los Angeles – has decided that it wants to ram this message home to the target audience. And who would the primary target audiences be? – people who have more sex, in other words not friaries and nunneries(again an assumption). And people who have more sex, or likely to have unprotected sex, are most likely to watch porn videos (once again, I wonder if that is the case). So voila, ensure that everyone wears condoms in them! And then you pass a law to do that! No one in Big Brothers’ councils can oppose it since it would not be considered politically correct to oppose a measure of this sort and thus the law gets passed.
It was very interesting to see a statutory warning pop up in large type whenever someone lit up in the latest James Bond film “Skyfall”. It certainly took away a little from enjoying the movie, and it is debatable whether this measure will in any way help to reduce smoking. In any case, who was Ramadoss trying to protect us from? From ourselves? Why is he forcing his views on me when I am watching a James Bond flick?
And who is the government to decide what is good and what is bad? Are they the final arbiters of good taste, or for that matter, health? What is to prevent them from decreeing that every time a character drinks a cola, he/she has to turn to the audience and announce “to reduce calories use aspartame in instead of sugar” (when in fact diet colas could turn out to be more harmful than the sugar-filled one because of this very chemical); or every time the family sits for a meal of desi paratha with ghee there is a message saying “ghee is full of calories, replacing it with mono-unsaturated, non-transfat ,HDL filled, vegan, refined, fatty acids is good for the heart (when in actual fact most of that rubbish is bad, and ghee is good!)?
Do they have the right to interfere with our right to enjoy things we want, unadulterated with someone’s views of what they think is good? Do we allow Big Brother to invade all aspects of our lives, and reach out to us both overtly and subtly through every means that we reach out to the world with? Will we let every lobby or powergroup out there try to manipulate our thinking?
Why can’t they too put out their views out there like everyone else and let us decide what is good or bad? As individuals shouldn’t we be left to decide on our own what is good for us?
The irony is that the US is the nation that professes to believe most in individual liberty, but it is the place today where being politically incorrect and airing contrarian views is the least accepted. There are more and more holy cows which cannot be questioned… and Big Brother wants to ensure that we all subscribe to those views…
A further irony – the porn industry in the US is the only place in the world where the incidence of AIDS / HIV is zero. Yes, zero. That’s because they have taken self-regulatory steps to ensure this!