The surprise Trump win has weighed heavily on the gold market. Since the initial knee jerk move higher, the gold chart has resembled a graph of the number of survivors on an episode of the Walking Dead. It has only gone one way - down.

The gold price is now off $160 from the highs seen election night. That’s a huge move. Every time it seems like it might get up off the mat, it gets hit again.

My initial read regarding gold’s weakness was that the massive US dollar rally and the large backup in yields were responsible for most of the decline.

But last night I stumbled upon an article that helps explain why gold has been getting hit worse than one of our Walking Dead heroes being clubbed by Negan’s baseball bat Lucille.

Due to the surprise Trump win I have not paid enough attention to the recent developments in India. Most of us are aware of the controversial decision by Indian Prime Minister Modi to ban 500 and 1000 rupee bank notes. But I was completely unaware of the rumour spreading through the precious metals community about the potential for the Indian government to also ban gold imports. According to Nigam Arora, India imports 700 tons of gold a year. He predicts a $200 drop if the Indian government follows through.

I understand why the Indian government might be contemplating this move. If you make it more difficult to hold large sums of wealth in cash, individuals will look for alternatives. Gold as a store of value is already deeply entrenched in Indian culture, so when Modi banned the larger denomination notes, individuals would obviously flock to alternatives such as gold.

Although I had trouble finding a good chart of the premium Indians pay for spot gold, I found this Bloomberg calculation that at least approximates the day to day changes:

The rush to buy gold in the aftermath of the news was acute and drove the premium Indians pay for spot gold to absurd levels.

You would guess that a government banning cash would be beneficial for the price of gold, but as the trading community caught on that a government willing to ban large denomination bank notes might also be willing to ban gold, panic set in.

Over the long run governments cannot hold down the price of gold, but just ask Keynes about holding positions over that time period. The banning of gold by the Indian government would be devastating for the short term price of gold.

I am obviously late to this rumour. By the time it is gracing the pages of MarketWatch, most of the selling has been done. It is only the dentists left to liquidate their longs. (Just kidding, everyone knows the dentists don’t trade anymore, and I am not sure who is the new “dentist” equivalent in this day and age. Since there is basically no retail left, I guess that leaves mopes like me).

I still think gold is trading mostly on the back of US rates and the greenback. Yet I would be lying if I said this Modi rumour doesn’t scare me a bit. Although I understand his rationale for banning large denomination bills in an attempt to crack down on corruption, I think restricting individuals’ ability to hold wealth in cash is a dumb move. First of all, for the government, it is a perpetual loan at 0% interest. But more importantly, it does not inspire any sort of confidence. If Modi were to insist on taking this route, a smarter move would have been to just stop printing the new higher denomination notes. Yes, it wouldn’t have accomplished what Modi is hoping as quickly, but creating a panic by making bills worthless on a set date only creates uncertainty. The only reason there is even a rumour about Modi banning gold is because individuals adapt. Ban cash, they move to gold. You can’t stop corruption by outlawing the means in which corruption is transacted. It’s like trying to fix the drug problem by restricting supply. The demand stays the same, and all you do is increase the price of drugs. Better to address the demand side of the equation and teach society’s members why heroin is not a smart choice for an afternoon’s intoxicant. The same with corruption. Banning cash will not fix it. Shame on Modi for thinking otherwise.

This desperation on Modi’s part worries me. As governments become more desperate there is an increasing chance they will ban gold and other stores of value. But here’s the thing about gold. You can outlaw it, yet that will only increase the demand. As there is more of a need to hide wealth from the government for fear of confiscation, it only increases gold’s allure. Gold is small, easily transportable, nobody’s liability. There is a reason it’s desire** as a store of wealth has survived for thousands of years. Banning gold will change today’s price, but it will only increase its long term value.

Back to the short term squiggles of the market. I don’t think Modi will ban gold. Dozens of people have already died with his latest bank note stunt. At the very least he will take some time to examine the effectiveness of his current policies before going full FDR.

The market has become convinced the US economy will come ripping out of this slow growth funk. President elect Trump has the magic cure for all that has ailed the global economy since 2008. Rates and the US dollar are only headed one way - up! And gold is only headed one way - down!

It is scary as not only I am fighting the overwhelming consensus, but Modi has added in that little bit of extra fear that makes gold long positions seem especially stupid. But over the years I have found that doing the hard trade is often the right trade. And nothing seems harder right now that buying some gold.

Thanks for reading,
Kevin Muir
the MacroTourist