Government of India has been buying gold, physical gold.
It recently bought gold taking its own holding of the yellow metal to almost 10% of its foreign currency reserves.
As per RBI reports, India now holds physical gold worth around 70 Billion US Dollars.
While on the one hand government has been buying gold on the other it has been telling people not to buy physical gold, instead buy Gold Bonds.
It even offers interest on these Gold Bonds.
Does this not raise any questions in your mind? Why Government itself is buying Gold and asking you to buy Gold Bonds?
Gold is considered a hedge against change in currency values, but why do currency values change?
There are many reasons for a currencies value to change, one of them being reckless issue of currency.
Under the Obama Administration, US Debt was around 16.4 Trillion USD.
Currently this figure stands at 31.4 Trillion. In seven years, after Obama’s presidency ended in Jan 2017, the US Debt has grown by more than 100%.
Same can be seen in India. Money supply in the system has more than doubled since December 2016 till December 2023 and continues to rise.
In basic economics, if the supply of a commodity (and money is now a commodity, actually was always a commodity), rises, its price / value automatically falls.
Thus when money supply rises anywhere in the world, as we are now a more connected economy than previous times, value of currency falls.
Gold value is reflected in this rise and fall of currency value.
As nations create money out of thin air, backed by debt instruments, the value of money has been falling.
There is a fear in those who hold this paper money, which is more like funny money now, that the value of such money can fall to zero leading to losses.
Thus people buy gold as a hedge to this risk and also as a hedge to inflation. Gold prices rise in tune with inflation.
Whenever there is uncertainty in the world, a war like atmosphere, a war in progress, people rush to gold as a safe haven and a store of value.
So, coming back to the question, why government is buying gold and asking you not to buy?
The reason is that any purchase by the government can be pledged to raise foreign exchange while when you buy gold there is a direct drain of foreign exchange from the country’s reserves.
That is why Government wants to buy gold but wants you to buy bonds, which are nothing but paper in exchange of paper and therefore does not lead to US Dollars going out of the country.
The Government Gold Bond scheme also creates problems for the Government as it has to either redeem the bonds with physical gold, leading to outflow of foreign exchange (eventually) or it has to pay you the value in Rupees. As gold prices rise, the government ends up paying a hefty premium to gold bond holders which is beyond the normal return on any deposits.
If you are a true patriot, buy Gold Bonds. For me, I don’t trust the government and I would go with physical gold, not jewelry but gold coins and bars….
