Spending on assets that appreciate, rather than consumption goods such as vacations may very well be the ultimate lesson to employ in the new-year. At least that was the logic this Indian man employed when deciding to buy his $231,014 gold shirt.
The story broke in India, covered by Ukmalayalee, which reported the shirt to weigh 3.5kg, equivalent to 113 troy ounces, assuming the shirt is solid gold. At $1,650 a troy ounce, the $44,564 premium “employed as many as 15 goldsmiths from Bengal, [who] worked for 16 hours a day over a period of two weeks to make the shirt.”
The buyer was quoted in Pune Mirror newspaper commenting on his purchase.
“The buyer is in the business of money lending,” reported Ukmalayalee, yet we note that he does not invest in paper gold, such as ETFs, despite the cost of crafting physical gold, whether jewelry or coin format. In India, 61% is spent on jewelry, and 39% on coins, bars, and other investments.
Does this banker not realize that the Indian central bank desperately wants people to save in paper gold, whereby their individual demand for gold is sequestered, and does not impact the real physical gold market? About $2 billion in Indian wealth has been tricked into investing in these products, according to a 2012 Goldman Sachs report.
Either way, the population at large has continued to ignore the worries of the central planners; it is not possible to covertly steal wealth from those who save in gold.
One place planners have relented is companies that lend against gold as collateral. A report from the Reserve Bank of India (RBI), India’s central bank, says “asset quality, bad loans, capital adequacy and borrowing sources of these companies aren’t a cause for concern.” Whether the banker with the gold shirt lends against gold, or against collateral more common in the west is another matter; however, lenders who do accept gold as collateral commented to Bloomberg:
This comes as good news for the gold community. The Indian government became increasingly frustrated this year with the cultural bias towards physical gold savings, and attempted to impact behavior by doubling import taxes. This improves the revenue stream for the government, and makes precious metals effectively more expensive for Indian importers. Taxes on silver and gold money incentivize people to use paper currency that is not taxed, so long as the rate of loss in purchasing power in paper currencies is less than the tax on metals.
This last point is very important. When citizens believe that price inflation will be “their biggest economic concern,” as it is for U.S. voters, they may calculate that the future loss of the purchasing power of paper currency will be greater than the difference between saving in currency in banks without penalty and saving in precious metals including a tax. It appears our gold-shirted Indian lender has already done the math.
We add in closing that this underscores the ground-shift taking place some Eastern nations. When gold and silver money are not taxed, the monetary metals compete on a level playing field with un-backed paper currencies. This means more people will view gold and silver as money, using them to both store value and transact. Anyone who views silver and gold as money has infinite demand for them, just as you or I personally have an infinite demand for dollar bills today—who does not want more money? Only mediums of exchange enjoy infinite demand, whereas the demand for hamburgers or automobiles is finite.
As for the Indian banker, who understands one can never have too much gold and silver, he planned to wear his new shiny shirt to ring in the New Year.