The main worry about Gold is that we have a large
import-bill and demand for more foreign exchange would increase current account
deficit. Gold is only one of the investment asset class and is safer and liquid
than others, it is a safe-haven asset, it competes with other investment class in
the market that yield a return. When you invest you commit to hold the amount
off consumption and the market offers a return, but gold gives you the opportunity
to sell whenever you think it is profitable, similarly like bonds, but other
investments such as fixed-deposits offer returns only after a time-period is lapsed.
However, historically gold supply was matched with the money-supply and higher
money-supply would increase inflation and therefore would reduce the
purchasing-power of gold, but it may increase the nominal returns as a result
of inflation. However, if people suddenly start hoarding gold the price of gold
would shoot-up when there would be more money-supply in circulation and prices
of other Goods & Services increase, which is just a different transfer of
money owner ship. The CAD point and the exodus of money from the economy while
importing gold seem justifiable while arguing that it is unproductive for the
economy and therefore the government wants to lower demand of gold. Indians
have a taste for gold also because it is a status symbol, but the investment demand
is high too and increases when other investment assets like equities and debt do
not perform well during slowdowns, however people think that gold is also a
protection against inflation, but they fail to take into account that other
prices have gone up too and real-price or purchasing power of gold is actually
down. The gold monetization or deposit scheme might help circulation of gold
within the economy without dependence on imports, in other words it helps manage
demand, supply and price of gold within the economy. Notwithstanding, the gold
bond scheme, offering the market-price of gold might also help reduce demand
for imports and save foreign exchange.
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