Author Archives: Jayant Bhandari

     

 

 

A Market Gripped by Fear

The Indian Prime Minister announced on 8th November 2016 that Rs 500 and Rs 1,000 banknotes would no longer be legal tender. Linked are Part-I, Part-II and Part-III updates on the rapidly encroaching police state.

The economic and social mess that Modi has created is unprecedented. It will go down in history as an epitome of naivety and arrogance due to Modi’s self-centered desire to increase tax-collection at any cost.

 

shopIndian jewelry merchant

Photo via indiatimes.com

 

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When Money Dies

In part-I of the dispatch we talked about what happened during the first two days after Indian Prime Minister, Narendra Modi banned Rs 500 and Rs 1000 banknotes, comprising of 88% of the monetary value of cash in circulation. In part-II, we talked about the scenes, chaos, desperation, and massive loss of productive capacity that this ban had led to over the next few days.

 

modi-belgaum-pti-759Indian prime minister Narendra Modi – another finger-wagger, as can be seen in this photograph. Beware finger-wagging politicians, as we always point out. Modi now plans to impose income tax penalties on large bank deposits; the State’s rapaciousness knows no bounds and evidently the mere possession of some arbitrary amount of money considered “too large” now means one is deemed a criminal a priori in India. It goes without saying that the concept of property rights is alien to Modi. [PT]

Photo via indianexpress.com

 

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Chaos in the Wake of the Ban

Here is a link to Part 1, about what happened in the first two days after India’s government made Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes illegal. They can now only be converted to Rs 100 (~$1.50) or lower denomination notes, at bank branches or post offices. Banks were closed the first day after the decision. What follows is the crux of what has happened over the subsequent four days.

 

modi  India’s prime minister Nahendra Modi, author of the recent overnight currency ban

Photo credit: indiatimes.com

 

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India’s Government Makes Banknotes Worthless by Decree Overnight

As I write this in the morning of 9th November 2016, there are huge lines forming outside gold shops in India — and gold traded heavily until late into the night yesterday. Depending on who you ask, the retail price of gold has gone up between 15% and 20% within the last 10 hours.

 

img-20161109-wa0003Gold quotes in India – gold traded for as much as Rs 49,000 per 10 grams or US$ 2,294 per ounce

 

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Mining Stocks, Gold Prices and Commodity Price Trends

Gold has gone up >400% over the last 16 years. Ironically, it is hard to find a gold mining equity exhibiting similar performance. In retrospect, if one invested in gold, one not only made much better returns, one also took a relatively insignificant risk in comparison to owning equities—equities can go to zero while it is hard for a commodity to fall much below its cost of production. Moreover, depending on the jurisdiction, owning gold might have resulted in lower (or no) tax liabilities.

 

South DeepSouth Deep gold mine in South Africa

Photo via mining.com

 

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Going Up for the Wrong Reason

Gold is soaring. It should—and a lot—but in my view not for the reason it is. Indeed gold is insurance for uncertain times, a time that Brexit seems to represent. But insurance is an administrative cost — one must minimize its use.

 

August Gold, dailyAugust gold contract, daily – gold has been strong of late, but this seems to be driven by “Brexit” fears – click to enlarge.

 

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Money Printing and Price Inflation

Ten years back when the central banks around the western world—as elsewhere—were printing money with abandon, it was claimed by rational observers that this would lead to hyper-inflation. It was claimed that the best the central banks could do was to control short-term interest rates, surreptitiously expropriating the wealth of citizens.

Eventually the market had to find out, directly or indirectly, what was happening — as newly printed currency played havoc in the market — and prices in nominal terms would rise. Long-term yields on sovereign bonds were expected to sky-rocket, to account for increasing inflation.

 

800px-Salon_de_Madame_GeoffrinThe Age of Reason: Salon de Madame Goeffrin, a painting by Anicet Charles Gabriel Lemonnier, showing distinguished French thinkers of the Enlightenment gathered in one room.

 

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