| by Victor Cherubim

( August 21, 2013, London, Sri Lanka Guardian) Whilst there is a run on buying gold in India as people get panicky against the wishes of their government for wealth preservation, simultaneously, there is a shortage of “black gold” – coal - in China for industry. China wants to make use of coal as an electricity source more clean and responsible. It is well known that domestic burning of coal is no longer permitted in Chinese cities. In India, the rising current account deficit and the fall in the Indian rupee, has left India with gold serving a double purpose of consumption and investment. It has become a hedge against inflation than savings. Gold is now the second largest expense on India’s import bill after crude oil. Is there anything common between gold and coal?

Flashpoint of confidence

Coal and gold have been sought after as “reserve” commodities from time immemorial for their own respective intrinsic values. With the prospect of future rising interest rates and record debts, a flashpoint in confidence is nearing reach not only in India or China, but globally with trade falling off. This is a protectionist phenomenon, which is cyclical.

China is the world’s largest consumer and producer of coal, which accounts for about 2/3rds of its energy needs. “Black gold” is in short supply as somewhat attributed to the closing of some markets due to supply and demand factors. Some analysts say there is no real shortage as American companies are exporting huge amounts of coal from the Pacific coast to China, as China pays more for US coal. Others state there is increasing sign of “softer” Chinese coal demand growth going forward due to China’s own coal production, but more due to falling coal prices from Indonesia, Vietnam and Australia, which are closer to market and less exposed to freight costs. But is it the price, the advantageous energy content of US coal why China pays more for US, or is it the slowing down of the breakneck economic growth of China in the past five or more years, causing the shortage?

Culture of short term gain for long term pain

In India all gold is imported. Here is a market that appears to be price inelastic. Even with an increase of 500% in world prices since 2000, it has had no effect on curbing demand. This is because Indian households hoard gold.

Investing in gold was for many Indians according to a report in the business newspaper, “Mint”, a perfectly logical decision.

“............................ the view that the Indian household makes a sensible decision to hoard gold. It is sensible because access to financial assets remains difficult and where access is easy,
the regulatory failure to stop large scale cheating of retail investors..... has broken the fledgling faith in markets for the average investor. Regulatory and institutional failure is the reason people hoard gold and not because they are stupid. And as the country looks more and more unstable, we buy more and more gold – perfectly logical and rational. This is no different than industrialists moving their business overseas and the rich buying real estate and stock abroad”.

But many will argue it is not the full picture and they may be also logical in their reasoning.

Parking our money in Gold

Parking money into gold is nothing new in Sri Lanka. We have heard so often that there has been a fall in the price of the Sri Lankan rupee due to the demand for import of gold to Sri Lanka.

One wonders why the exchange rate for the Indian rupee has increased to Rs.99.00 to the British Sterling Pound and whether we will catch this cold too.

The people of Sri Lanka, in particular the Sinhala people were never used to wearing gold as an ornament or as an investment. They may have not been foolish to want investment in a dead asset only with expectation that value would appreciate. So why is our Central Bank wanting to prop up the Sri Lankan rupee to cater for the whims and fancies of the Jewellery parading sector of our population instead of correcting the inflow and outflow of gold?

Have we changed our traditional way to fall in with opulence to wear gold now as a status symbol, and lost confidence in our currency as reserve asset?

Our greatest asset is our traditions and culture which have stood the test of time. Our Ayurveda, our respect for our elders, our simple but honoured greeting with beetle leaves when we visit our nearest and dearest, our observance of “ pirith” and “pansala”in white attire, are to mention a few of our characteristic traditions which have stood us in good stead over centuries when western values have raided our real wealth?

It will not be surprising if a law comes into effect in Britain soon due to the state of the economy, to prohibit the import or export of gold into the country, or if HM Customs permit currency restrictions for those taking out large sums of money abroad, possibly to buy and hoard gold abroad.

The time is ripe to stop the outflow of our currency. I do not mean to go back to exchange controls. I would like to see our government to motivate our masses, particularly our educated upper middle class to climb out of the gold hoarding mode and go into the wealth generation and preservation mode. It is time again to go back to our roots and preserve our culture to rely in our culture, we trust.

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