If inflation and supply
side factor are considered it is a structural problem because due to high
inflation, especially oil (we can do little about) and food, which are stuffed
in government coffers. It is all the indifference of the government which has
made prices overshoot the inflation target, and this is about food and food
prices... Therefore, if prices are high due to mismanagement of the government
and fiscal spending (too much), it is a structural problem. Liquidity I do not
think is a problem since inflation is high and prices are a problem, too much
money chasing the government food stock…
If banks will buy gold
from ordinary citizens it would be inflationary since it will push liquidity
into the system. It is like open-market-operations when you buy gold/bonds it
means you are increasing money supply and therefore expected inflation and when
you sell it, it means you are sucking liquidity out of the system and thereby
lower inflation. It is not intelligent to put pressure on already elevated
prices...
If everybody will try
to sell the same time, prices will start falling… But why anybody would sell
gold and not holding it, because prices may still go up? If they are expecting
a downturn, sort of crisis, they will buy gold because the first thing that goes
down in any crisis is the stock market and since there is an (observed)
negative correlation between the gold prices and stock prices it means that if
the gold investors are expecting a downward correction in the stock-market or a
slowdown in the economy they will invest in gold, a safe-heaven like dollar for
investors. And that will keep the gold prices from going down, too much.
Investment in gold will increase and will increase our imports. Our demand for
gold is largely inelastic. A slowdown will further increase demand for gold and
its import further, again, worsening our CAD. If the government wants people to
do away with gold and imports it should maintain an environment conducive to
investment in the stock market to divert resources from investment in gold…
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