Indian Prime Minister Recalls 500 and 1000 Rupee Notes on One Day Notice.
Gold Demand and Premiums Soar in Aftermath of Announcement.
Gold Premiums soar to 66%
Gold Sales Spike 23X!
Long Lines and Lack of Cash To Exchange Rupees.
The Official Reason vs. The Real Reason.
India’s Shocking Surprise Attack on Cash
Modi’s Announcement – The Exchange or Deposit
Last week, the Prime Minister of India Narendra Modi, made a surprise announcement that had been kept secret from many in the Indian government, that 500 and 1000 Rupee notes would no longer be legal tender within 24 hours. The Prime Minister cited the need to fight corruption as justification for the removal of the 500 and 1000 Rupee notes.
The removal of the then circulating 500 and 1000 Rupee notes, according to the BBC, in effect demonetized 86% of India’s existing cash.
Modi attempted to downplay the shocking ban of existing 500 and 1000 Rupee notes by telling Indians, while they could no longer use the notes effective almost immediately, over the next sixty days they could deposit them in their accounts at the banks and post offices across the country or they could exchange the notes for new 500 and 2000 Rupee notes.
Despite long lines, deposits of the demonetized 500 and 1000 Rupee notes seem to be going smoothly despite lines. Exchanging the old notes however has been problematic as the banks do no have enough of the new notes to meet the exchange demand. In some instances, the banks have been forced to use coins to complete the exchanges.
Soon after Modi’s announcement, jewelry stores were swamped with people wanting to buy gold with their notes before the short period in which their notes would no longer be legal tender. The Times of India reported massive late night volume at jewelry shops in India.
What Were the Real Reasons Behind India’s Rupee Demonetization?
Assist in the War on Gold -The Rupee Ban is Opens a New Front of the War on Gold
Indians love gold and India’s government hates that they love gold. It is estimated that Indian households own 18,000+ tons of gold. Gold is outside the system, portable, fungible, and widely recognized as a store of wealth and medium of exchange. Gold does not require a government mandate to give it value. Gold is also hard to track, especially if purchased with cash.
India’s War on Gold Not Going Well
India’s gold monetization scheme has been a spectacular failure. Only a few tons of gold have been exchanged (mostly from temples, not individuals) for the interest bearing rupee notes the Indian government has offered for physical gold.
The Indian government instituted a 10% tax on gold imports in late 2013, justifying the duty on the grounds that excessive gold imports screws up their balance of trade. Gold imports were not slowed as a result of the new tax in 2014-15 as low gold prices, even with the 10% duty still made gold attractive and imports continued to soar. In 2016, however higher prices and the 10% duty slammed gold imports into India.
Despite the 10% import duty, gold imports in 2015 were nearly 1000 tons.
“While these efforts are afoot, public are encouraged to switch over to alternative modes of payment, such as pre-paid cards, Rupay/Credit/Debit cards, mobile banking, internet banking. All those for whom banking accounts under Jan Dhan Yojana are opened and cards are issued are urged to put them to use. Such usage will ‘alleviate the pressure’ on physical currency and also enhance the experience of living in the digital world.” [emphasis added]
It appears it was no mistake that sufficient new rupee notes were not printed in advance of Modi’s announcement.
Force Cash into the Banking System to Recapitalize the Banks.
The cash demonitization with a ‘deposit’ feature and only limited exchange availability in effect forces Indians to put their demonetized notes into the banks. Once in the bank, they can be issued debit cards and offered credit cards and thus begin a massive move away from cash and into a digital, trackable society.
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