Pink note turbulence sets off gold rush
The Reserve Bank of India’s (RBI) decision to withdraw the Rs 2000 note has not created the dismay we saw in the November 2016 demonetisation process, but the underlying disquiet cannot be missed. A relatively long period allowing people to change their pink notes to smaller tender, till September 30, has perhaps kept tensions within manageable limits. However, the surest sign of the turbulence the second demonetisation round has caused is the stampede for gold. The Rs 2000 note can be deposited in bank accounts and exchanged in lots of Rs 20,000 with no questions asked. Yet many who had stashed the pink notes in large numbers seem to prefer gold as their new parking lot.
Reports from the bullion markets in Mumbai, Jaipur, Surat and other centres said there was a sudden spike of 10% to 20% in people buying gold, silver and jewellery. The high commission in unofficial trading reflects the high volume. In Mumbai, on Saturday, the day after the pink note was withdrawn, gold was sold for around Rs 67,000 per 10 grams when paid for with Rs 2,000 notes, compared with the official rate that day of Rs 63,800. Jewellery has not attracted huge commissions, but jewellery buying, too, has shot up 10–20% in the last few days. All this can be partly explained by many preferring to avoid the taxman’s scrutiny.
However, gold has always been the safe haven for investment and short-term parking of funds when the economy is turbulent. All over the world, it is seen as a hedge against inflation and a good investment option as it is very liquid and has generally shown an upward movement in prices. In India, gold has shown a higher appreciation, giving 13% returns from last year, much higher than other asset classes such as equities and property. It also has cultural importance. Gold wealth has always commanded snob value, and no big fat Indian wedding is complete without a high transaction in the yellow metal. Demonetising the Rs 2000 notes has suddenly reinforced many of these negative trends. India has the largest hoard of privately held gold, estimated at above $1.5 trillion. For years, the government has been attempting to unshackle this largely unproductive stash and make it an engine of production and growth. However, the latest RBI decision will only reinforce the tendency to keep gold locked up.