Indians turn to gold as cash draws short in countrywide banknote switch

by Angie Kean  (originally published in the SNL Financial of 15 November 2016)

The banning of certain banknotes in India has driven the local price of gold up to around US$2,800 per ounce as people scramble to convert cash into the precious metal.
On Nov. 8, Prime Minister Narendra Modi banned 500 and 1,000 Indian rupee banknotes in a bid to be seen to be tackling corruption ahead of elections in certain states in two months.

However, this has placed the country on the verge of a major social-political crisis, according to Anarcho Capital analyst Jayant Bhandari, who is currently in India and witnessing the fallout first-hand.

Modi appears to have timed the move to coincide with the U.S. election, with the news receiving little international coverage as Donald Trump’s election as president of the U.S. dominated headlines around the world.

Gold, which is largely brought into India through smuggling, is rapidly becoming a scarce commodity in the country.

“People are now converting whatever they can into gold, silver, and mostly for the first time into the U.S. dollar and other foreign currencies, all trading at huge premiums,” Bhandari said. “This money is also moving out of the country. Gold has reached as much as US$2,800 per ounce, if you can find it.”

Indians are only permitted to withdraw about 20,000 rupees, or just under US$300, a week and they can only convert about 4,000 rupees, or US$60, to the new currency because banks are running out of cash fast.

The banned notes can only be converted to 100-rupee or lower denomination notes at banks or post offices.

“There is no guarantee that their money will get converted because the banks keep running out of cash,” Bhandari told SNL Metals & Mining from India.

“The biggest problem is that 25% of the population who do not have ID cards and do not have a banking system have no way to convert their money. These people are killing themselves, they’re going hungry.”

Nearly 90% of the monetary value of the Indian currency is no longer legal in a country of 1.3 billion people and where 97% of transactions are cash-based.

“Imagine sucking out 88% of currency from the market and replacing it with a new currency,” Bhandari said. “The Indian government is simply incapable of doing that.”

The move has seen corruption and crime skyrocket. Bribes are on the rise and the new currency is still far from counterfeit proof, with fakes in circulation just three days after the release of the new notes.

The price of common products such as salt and sugar are also surging higher on rumored shortages. Salt is selling for around 400 rupees or US$6 per kilogram.

Despite the dire situation, it is unlikely that anyone will stand up and push back against Modi’s most recent move.

“People of this country do not have a moral instinct,” Bhandari said. “They do not fight for what is right. They adjust themselves according to the circumstances. There will not be a collective opposition.”

There have been bombings and riots in various parts of the country and a curfew has been implemented in some areas to stem the incidences of riots.

It is too early to tell what specific impact Modi’s decision to ban certain banknotes will have on India’s mining sector, but Bhandari noted that “one weak strand” will impact the whole economy.

“Workers cannot reach their destination because they don’t have the cash to go to their destination, they can’t work in the factories and if the factories cannot pay them they won’t work,” he said. “If the transportation people cannot supply food, people will go hungry and then they can’t work.”

“You don’t know what kind of problems will happen, but I do know that just about all the small businesses, who are the basic backbone of the country’s economy, are suffering very, very badly.”

As of Nov. 15, US$1 was equivalent to 67.77 Indian rupees.