Tuesday last week, India’s Prime Minister Narendra Modi demonetized 86% of the money in circulation, except for special uses. Ostensibly, it was a move to check black money, i.e., counterfeit money, money that was gotten through graft or corruption and money on which taxes had not been paid. In the four trading days following the Modi move, the price of gold collapsed $60.
What the market realized was that gold buying in India makes up about 20% of the world’s demand and that much of the gold purchased in India was with black money. However, since Friday’s drop, the price of gold has stabilized.