Funny things start to happen when economies are rigged. People get desperate, and in their desperation they break the law.
Here in the U.S.A., we’re all-too-familiar with one manifestation of this effect. Just take the Outsider Club’s hometown of Baltimore, Maryland for example. Crime and drugs go hand in hand with a lack of jobs, poverty, and corruption.
As the scale of the manipulation gets worse, more and more people find themselves in desperate situations. Over in India, we can see how smuggling and law breaking work their ways up the income brackets.
In early March, Indian revenue intelligence officials boarded two Jet Airways flights.
In the bathrooms, incredibly valuable contraband goods were stashed by unknown smugglers. The 14 kilos weren’t of heroin or cocaine, like we might expect in such a situation.
It was contraband gold, worth more than $650,000 in India.
Supply Meets Demand
The smuggling of gold has ramped up dramatically over the last year in India, right alongside crippling punitive restrictions on gold imports.
The smuggled gold stashes discovered on the Jet Airways flights were only two of many found in the last several months.
This isn’t the only route smugglers take. Gold is also smuggled in the form of granules mixed with other metals, seed-shaped chips hidden in dates, belt buckles, and fake painted objects like batteries.
“This is unprecedented and unbelievable. A new industry has emerged in India — it is a very dangerous situation,” says Konal Doshi, a top official at the Gems and Jewelery Export Promotion Council, a Mumbai-based offshoot of the Indian Commerce Ministry.
According to his figures, smuggling rose by almost 300% between March 2013 and April 2014, making gold the most smuggled contraband in the nation.
An estimated 700 kilograms of gold works its way into India every day. Over the course of the year, it would add up to 255.5 tonnes of gold worth $11.5 billion. Only about 1% is seized.
Quite frankly, I can’t blame people for breaking the law by purchasing illegally imported gold. The Indian rupee has seen staggering double-digit inflation as the economy has sputtered.
People reacted as they should. They tried to trade the increasingly worthless fiat currency for anything that could maintain value.
Backlash from the Indian government in its attempt to contain the capital flight was draconian:
- Gold import duties were steadily hiked from 2% to 10% for gold and 15% for gold jewelry.
- Gold imports became tied to export volumes.
- Coins and medallions were outlawed and domestic buyers could only purchase gold with cash.
- As people purchased more silver and platinum, 10% duties were slapped on them as well.
And yet the underlying problems of rigged economies, corruption, and capital flight were not addressed in any meaningful way. The people bore the brunt of the burden for entrenched government officials and the moneyed elite.
Indian gold premiums have soared to $130 per ounce over London prices, assuming legal gold is available at all. No wonder people turned to smugglers, who chased the best profits away from cocaine and heroin to gold.
In what is a sign of the times, the government offers informants up to 50,000 rupees per kilogram of gold seized. Cocaine and heroin informers only get up to 40,000 rupees and 20,000 rupees respectively, by comparison.
This is all because of a rigged economic policy designed to prohibit people from keeping what is theirs by right.
Of course, there are many ways to rig economic policies, and if we head east to the other major gold-buying nation, we see something else funny going on.
Secret Gold
In a move to expand import capacity, Chinese officials have announced that gold imports will be allowed to flow directly through the capital of Beijing.
This is in addition to imports through Shenzhen, Shanghai, and Hong Kong. However, the new move could threaten business in the latter.
The reason is simple. China doesn’t want people to know how much gold it is buying as it moves reserves away from other currencies and expands the international presence of the yuan.
While information on imports through Shenzen and Shanghai is scarce and unreported by the Chinese government, Hong Kong discloses how much it buys and sells.
China imported nearly 1,160 tonnes of gold from Hong Kong last year. Analysts from Global Trade Information Services suggest that China imported at least another 194 tonnes last year from other sources.
All of this is on top of about 428 tonnes of local production. The World Gold Council has said Chinese demand in 2013 was 1,066 tonnes, raising the question of where the other 716 tonnes went.
Many, if not most, in the industry believe that it went into the coffers of the People’s Bank of China (PBOC).
Concern is growing over the long-term effects of quantitative easing and mounting U.S. debt, leading China to shift away almost entirely from buying U.S. Treasury Bonds.
In spite of all the buying, the PBOC last released information on gold reserves in 2009, when it announced that bullion holdings had risen to 1,054 tonnes from 600 tonnes in 2003.
Unverified rumors amongst analysts in the industry suggest PBOC gold reserves actually range from 3,000 to 5,000 tonnes.
Given the advantages of keeping prices low and stealthily building up central bank reserves outside of debt-burdened fiat currencies, there is little chance of any increase in the official reserve figures any time soon.
China is one giant experiment in rigged economics, and it is using its tools to maintain an advantage while it can.
A Will and a Way
Both of these bizrre outcomes of economic manipulation illustrate that there is a fundamental truth behind the old adage, “where there’s a will, there’s a way.”
Rumors are starting to swirl regarding an end to the ultimately futile Indian gold restrictions. India’s newly elected Prime Minister Narendra Modi is widely regarded as a pro-business pragmatist when it comes to economic affairs.
Considering how clear it is that Indian citizens will buy gold regardless of punitive measures and restrictions, there is some hope that Modi would rather see the black market for gold reflected in official figures as opposed to remaining underground.
As for China, we can expect more of the same. Government officials are continuing to maneuver the yuan into an international role, further weakening the euro and U.S. dollar.
With $3.4 trillion banked in foreign currencies that are on shaky grounds, gold purchases will only accelerate for years to come, even if they aren’t easily visible.
There is a will, and it will find a way. Gold will continue to flow from the West to the East, and there is nothing that will stop it.
