Published May 09, 2011

Lessons on Gold from India

Dear Reader,

There’s one sure thing about QEIII. If it happens, the third round of quantitative easing will come at a high price for the U.S. dollar. And I don’t mean a dollar weakening over time; I mean a fairly rapid drop. The euro’s slide last week from $1.49 to $1.43 foreshadowed the dollar’s own future should QEIII be announced in the future.

So, what happened with the euro? The meeting before the last, the ECB raised rates. And though Trichet didn’t raise rates last time, he didn’t disregard the possibility of future rate hikes. He simply didn’t promise another in June. Shouldn’t the currency stay higher? In this case, the rate hikes and timelines aren’t the important part. It’s what was said between the lines that matters.

Essentially, this was the ECB’s real message: the euro will not become the preeminent stable currency of the world. We will increase rates and won’t let things get too out of hand, but don’t expect a leadership role here. Things are still shaky in Europe, and we will not spearhead higher rates for everyone else.

Though the recent rate increase from 1% to 1.25% is better than America’s 0-0.25% target, Europe has thrown the ball back into our court. But if QEIII happens, the U.S. may give up the ball to Europe, permanently. The size of QEIII will have little to do with its significance – much like the euro’s drop had little to do with interest rate parity. Instead, QEIII would tell the world, “Don’t look to us as the currency of reserve at least for the next couple of years. We’re going to stimulate our economy at any cost.” In this scenario, I could see the dollar plummet against the euro by 10-15% within weeks – a large move in forex markets.

Even if inflation in the U.S. remained relatively tame in the short term, the decision would ruin the dollar. QEIII would be more symbolic than anything else. It would admit the failure to revive the economy, the failure of Fed policy, and the end of an era for the U.S. dollar.

In a way, this makes me hopeful. Bernanke can pull the trigger on QEIII, but it will come at a very high price. The USD has already slid heavily with the second round of quantitative easing, but with the third installment, the results will be even more disastrous. However, weakening the dollar hasn’t scared Bernanke yet; so I can’t get too hopeful.

In today’s issue, Jeff Clark will interview Shanta, a friend from India. For a while, I’ve heard that Indians used jewelry as a storage of wealth. But I’ve never completely understood it through an insider’s perspective. This interview has really cleared up the matter for me. Furthermore, it draws some implications for investors here in the U.S. In India, people are very serious about holding gold; maybe we have lessons to learn. Then, I’ll briefly touch on marginalized but reasonable ideas.

When a Gold Necklace Isn’t Jewelry

Jeff Clark, BIG GOLD

When it comes to supply and demand, what you’ve been told about gold jewelry is wrong. That’s a strong statement, but I’ve got a firsthand account to back it up.

Most industry organizations separate jewelry from investment when they tally the numbers on the uses for gold. This makes sense, of course, because one is a coin or bar purchased as a store of value and the other is something designed to be worn. But what if large populations around the world view them as serving the same purpose?

My friend Jayant Bhandari, who’s worked for Casey Research in the past and is now a consultant to an institutional investor, has told me for years that excluding gold jewelry from investment demand is inaccurate because there are many Asian cultures where a gold necklace is considered, in all practical uses of the word, an investment.

I’ve often wondered to what extent that’s true. Do Indians, for example, really see a gold necklace as a preserver of wealth? Gold adornments are so widespread in their society – it’s hard to find a picture of an Indian bride who’s not wearing numerous gold accessories – that it seems obvious the use is, in fact, primarily as jewelry. But is something else going on here that escapes our Western view of the precious metal?

I decided to go the source. Jayant arranged an interview with me and his mother Shanta, who has lived in India her entire life. If anyone knows, it would be her. With Jayant translating, I learned some things I think you’ll find fascinating and perhaps make you reconsider how you view gold...

Shanta's relatives at a party. The nose piece is called a "Nath," and a "Tikka" is on the forehead. Both are worn by married women, though increasingly unmarried women wear them as well.

Jeff: Shanta, why do Indians buy a lot of gold?

Shanta: Indians feel deep in their hearts that gold is the best way to preserve and invest wealth. Indians have always felt that whenever they need money, they can sell their gold to generate cash. This is the way we have always done it.

Every mother wants to give her daughter gold because the wealth can be saved on her body. And the mother is secure in knowing the gold will stay with her. Even the mother-in-law thinks this way. That’s why it's commonly given during weddings.

Jeff: I understand that gold is very important to Indian women.

Shanta: Gold is the wealth of the women and is extremely important to them. Men don't give or receive much gold. It is transferred from woman to woman, from generation to generation. Men are usually not involved. Gold is preserved by the women so that if they have a crisis, they can use it.

Women consider gold to be their biggest security. Indian women have started working in the last decade, but the young working women are still passionate about gold.

Jeff: So gold jewelry is something more than just a pretty necklace?

Shanta: I do not think of gold as a necklace or a bracelet. Indian women think in terms of how much gold is to be given to their daughter or daughter-in-law. So it is not viewed as jewelry but as a basic store of value.

Every Indian likes to have gold. This is true whether they’re Muslim or Christian.

Jeff: How much gold do Indian families like to have?

Shanta: For the middle class, I would say roughly 20% of their total wealth is in gold. In the past it was more like half. Fifty years ago, they had no other option but to keep their wealth in gold. Now they can buy other things, too.

Jeff: Are some forms of gold more desirable than others?

Shanta: In the past women preferred to have jewelry, but there is a trend to keep some of it in brick form now. Some women reach the limit of jewelry they want to hold, so they buy coins or bricks. Even if the woman doesn’t wear the jewelry, she will still keep it.

Jeff: How do Indians acquire it?

Shanta: In the past you would take your gold to the jeweler, tell him what you wanted, and he would make it for you. The modern-day woman will pick something out from the jeweler.

Old jewelry keeps getting recycled. Every family has a lot of gold – four or five generations or more. Eventually you lose the emotional connection with certain pieces and will have them made into something else.

Jeff: Where do Indians typically keep their gold?

Shanta: Historically, Indians would hide their gold or bury it. These days they use bank lockers. But no one likes to talk about their gold.

Jeff: Would you and other Indians ever sell your gold jewelry?

Shanta: Gold is given as collateral, so you would only sell it if you had no other way to raise money. We prefer to keep it and won’t sell it unless there is a crisis.

Jeff: How is gold used as collateral?

Shanta: Gold is seen as a store of value and is only used when you really need money. So we would use it as collateral for a surgery or other emergency, a wedding, or maybe in an extreme case, a house. We would not use it for a TV or car or anything like that. We might sell some for education, so only for very important things.

Jeff: Might you sell some because the price is high?

Shanta: We typically would not sell gold just because the price is high. Gold is not an investment; it is a store of value.

Jeff: Is there much interest in buying silver?

Shanta: The key is gold. The rich and middle class normally buy gold, not silver. Silver is very common among the poor class, so if you are not rich, then you will buy silver. The poor people buy silver for the same reason the middle class buy gold.

Jeff: Do other factors affect why Indians buy gold?

Shanta: The stock market has recently fallen from a lot of corruption cases, so the people are increasingly interested in gold.

Jeff: Would it bother you if the price dropped?

Shanta: It would not bother me because I still have my gold. If gold makes a new high, I am not inclined to sell it, either. Of course, I would be happy if the price goes up.

Jeff: Thank you, Shanta.

Shanta: You are most welcome.

As Shanta makes clear, gold jewelry in India is more than a fancy adornment; it’s a store of value and preserver of wealth. It’s not even an investment; it’s more important than a rising brokerage statement.

In India and many other Asian countries, the form gold comes in is less important than how many ounces you own. If you lived in India, gold would represent about 20% of your assets.

So the next time you hear a report about gold jewelry in India, remember that Shanta and others aren’t wondering how good a gold bracelet will look on their wrist, but rather are seeing it as a vehicle for storing wealth.

I think there’s a lesson in this for us North Americans. How do you view the gold you own – is it a pretty coin, an investment, or a store of value? Given the obscene abuse most fiat currencies are undergoing, I think we’d be best served viewing it as not just a potential money maker but as protection against the rabid inflation that will damage our economy and dilute our pocketbooks.

[The U.S. dollar is tanking as we speak, and gold and silver have been shooting to never-before-seen heights. And thanks to out-of-control money printing and rapid currency debasement by the Federal Reserve, more and more countries – China being the most prominent – are planning to dump the dollar. Read more here.]

Marginalizing Ideas

By Vedran Vuk

It’s amazing how society can shape our perception of truth and reason. For example, Obama on 60 Minutes noted that bin Laden likely had a support network in Pakistan, either inside or outside the government. For him to live in Pakistan, someone must have known.

I completely agree with Obama – as I’m sure most of our readers do. But at the end of the day, what’s the proof? Sure, bin Laden’s presence in Pakistan was highly suspicious, but it doesn’t mean the Pakistani government was responsible. After all, war criminals have a long history of hiding in unsuspecting places. Look no further than WWII. Nazi war criminals have been found in every corner of the earth. It’s astounding. Why yes, some were even in the United States.

Ultimately, Obama and other congressmen are laying out a conspiracy theory. It is likely true, but it is nonetheless a conspiracy theory not currently based on hard facts. However, it is a socially acceptable conspiracy theory.

Other conspiracies are not socially acceptable, though the logic is close to the same. After the release of Obama’s birth certificate, the birthers were ridiculed without end. The government showed the birth certificate; so it must be true. But what about the Pakistani government’s denial of hiding Osama bin Laden? Supposedly, they knew nothing about Osama. Are we to believe them?  

If the Pakistani government should not be believed, can our own government be believed? Is our government run by honest angels while the rest of the world is a bunch of evil heathens? I hardly think so. Our own government has plenty of incentives to lie. However, it’s socially acceptable to distrust a foreign government, but society ingrains a trust of domestic governments. This is true in countries across the world. Kids simply aren’t often taught about the mistakes of their domestic government. In schools, every president was a hero and every war is just.

But this is just a small example. When it comes to spending cuts, many reasonable ideas have been marginalized by society as well. Take, for example, cutting the entire Department of Education. This country got along fine without the Department of Education for two centuries. In fact, many readers were educated in a pre-department world, and they received better educations. The world will not end without the department.

Yet, suggest to the average American a cut of the Department of Education, and they will look at you like the devil. “How could you hate teachers and the kids?” seems to be a common response.

If it’s socially acceptable, the masses will believe in conspiracy theories. If socially acceptable, they will viciously defend wasteful government programs.

Additional Links and Reads

New York Startups Rise With Wall Street Talent, Bondage Earrings

In previous editions of the Daily Dispatch, we’ve discussed the question, “Are too many smart people working on Wall Street?” Certainly, a Fed-induced bubble will send more people into finance and banking than would otherwise occur.

This article details some finance types leaving the sector to start new businesses, particularly in the fashion industry and technology. Furthermore, it details the rise of NYC venture capital and entrepreneurship. In my opinion, this is really interesting. Often, we’re told that these smart people should be working in the sciences or medicine. But apparently, the market has taken a different turn – at least in these cases.

Subcommittee on Monetary Policy Holds another hearing

Ron Paul’s sub-committee will hold another meeting on Wednesday. This time, the topic is monetary policy and the debt ceiling. This should definitely be another great hearing. I’ll make sure to post the event when it goes online. I’m not familiar with all the speakers, but I have read some of Richard Ebeling’s work, the first speaker. I look forward to his testimony.

Property & Environment Research Center (PERC)

I can’t quite put a finger on it, but somewhere in our publications, free-market environmentalism was briefly mentioned. Furthermore, readers have written in the past inquiring about the subject. Hence, I provided the link above to PERC, the premier free-market environmental think tank from Billings, Montana.

Regardless of your political views, these guys have some great ideas. Ever consider that over-fishing and species extinction are matters of property rights? It’s difficult to protect something no one owns. It’s a problem of incentives. That’s just one of the many interesting angles on environmental topics.

Well, that’s it for today. Thanks for reading and subscribing to Casey’s Daily Dispatch.

Vedran Vuk
Casey's Daily Dispatch Editor