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January 17, 2008

Indians Sell Gold - And Their Future
by Alex Wallenwein

Mineweb.com reported today (January 16, 2008) that Indians are selling gold to buy their country's stocks, allegedly because gold is "so expensive" and, in their view, therefore has little upside. On the other hand, they think that Indian penny stocks allow them to make quick 100 percent profits in the span of only one or two months.

Indian investors are about to learn a lesson in bubble psychology.

Apparently, their centuries old tradition of buying and holding gold hasn't allowed them to understand the real value of gold, namely the value of a hedge against all other "hedges" - going wrong!

At least they still have their traditions, while the western world has forgotten its own. Western style propaganda ("don't invest in gold; it's a relic of a bygone era!") has only very recently begun to be applied to India and has now finally taken hold. The Indian financial and political classes have been trying to get poor Indians to open bank accounts, take out loans, and invest in "the future" (meaning worthless paper instruments) for many years.

In the meantime, the Indian stock markets have enjoyed quite a boom. The Bombay Stock Exchange, Asia's oldest stock exchange, for example, has outdone the HUI during the last five years on a scale of more than 2:1.

Woe to the Indian who heeds the advice of his country's financial leaders!

In the ongoing global downturn, credit (and its little brother - risk) are fast becoming the pariahs they should be. US financial institutions and their customers (just about every American and untold numbers of foreigners) are feeling the pressure of decades of irredeemable debt weighing down on them.

Not only that, but as a result of the ongoing subprime credit crisis, the entire premise underlying any debt economy (that borrowers can by and large be counted on to repay their debts) is being thrown not only into question, but into outright derision.

Low interest rates fuel both economic bubbles and appetite for risk (in a low-yield environment, hig returns are only possible if ever higher risk is accepted), and risk is the thread that now unravels the fabric of the worldwide debt-based fiat currency system.

When rates are low, saving no longer pays and so it goes out the window. The only escape: typical asset bubbles such as those in the US stock, real estate - and especially derivatives markets.

India will not escape that trend because, in spite of all of India's venerable gold-buying tradition, the worldwide fiat/debt-economy is hard-wired into the Indian (non-gold) financial system.

The same trick once pulled on world wide gold holders by the US Fed under Paul Volcker is now being pulled on India's poor and middle class: by the siren call of "higher returns" they are suckered into foregoing their reliable gold savings in favor of questionable paper-promises Volcker did it by raising US bond yields sky-high in 1979. India is doing it by raising potential stock market profits to the point where gold owners "just can't resist" anymore.

Unfortunately, India's prodigious gold wealth will be bought up by its economic competitor, China, whose government tells its subjects that buying gold is a good thing to do. I'm sure there'll be some Arab buyers, too, as well as a few American investors who are only now slowly waking up to the scam - and who will soon have nowhere to go except toward gold in their wealth preservation efforts.

China has just passed the US as the world's second largest gold importer. India's longstanding record of being first in that category will fall victim to China's acquisitiveness very soon, if the current trend continues.

It's the same old story: India's new upper caste of newly rich debt-peddlers, a/k/a financial institutions, are skimming the wealth of the middle and lower classes. (Who knows? They might also be the ones buying the poor people's gold at lower prices!) Then, when the bust inevitably comes, the poor get left holding the bag while the elites get the first use of the printed money. Unfortunately, under the most likely scenario, China gets to hold all of the the gold.

The trend of Indian gold-selling and stock buying will have a mediate-term negative effect on world gold prices. Profit starved western mutual funds will dump their gold shares and gold futures. The price will drop. Skittish gold investors will sell their all-too precious metal, the world's top financiers (the ones who are actively rigging the markets for their benefit) and Chinese subjects and industrialists will get another chance at buying it at fire-sale prices, and everything will go on as before.

Except for one thing, that is: Members of India's poor and middle classes will be trying to bite their own rear ends off when they realize the huge mistake they have made.

Prognosis:

Gold prices will drop as a result of Indians' selling their inheritance to buy stocks;
They will fall all the way back to the $700 level, shaking out lots of stupid gold investors and traders;
The world will continue down its US-led path to economic self-destruction. At some point, western stock investors will realize there is no place left to put their remaining and dwindling funds - except into gold;
The gold price will rise again; newly paper-bound Indians and other investors will watch it rise, waiting for the "right time" to get back into gold;
By the time they get back in, their illusory stock market gains will have largely evaporated and gold will be back up to or near $900 per ounce again, robbing them of the fruits their misguided and misinformed attempt to wait for lower gold prices;

I remember when gold hit $600 an ounce a couple of years ago. A daughter of a local Indian jeweler told me that gold was "too expensive" and that the Indian jewelers were all waiting for lower prices.

Gold promptly shot up to $700, then dropped back to just under $600, stayed there for awhile, and now it's at $900 - and the story repeats itself. The gold dealers who were waiting for lower prices literally shafted themselves. Now, they are doing it again.

The bottom line? Indians will pay a high price for letting illusory paper gains bamboozle them into selling gold for stocks.

Advice for non-Indians: Sell your paper-gold if you really must - just don't sell your metal - if you actually have any!

The question that decides any investor's financial fate from here on out remains, and will forever be:

Got gold?

Alex Wallenwein
Editor, Publisher
The Euro vs Dollar Monitor

Just like driving your car, investing only makes sense if you can see where you are going. The Euro vs Dollar Monitor is your golden windshield wiper that removes the media's greasy film of financial misinformation from your investment outlook. Don't drive your investment vehicle without it!