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.
Now, gold investors should be focusing on Donald Trump’s promise of massive spending on the rebuilding the nation’s infrastructure and the military. I’ve seen reports that he wants to spend between $500 billion and a trillion dollars on roads, bridges and sewer systems.
As for military spending, it will depend on Congress, which may pick and choose projects. However, I doubt there will be much opposition in Congress to infrastructure spending. Still, all this spending will be inflationary.
Trump never was pinned down as to how the country would pay for the spending, but it appears he’s counting on an improved economy with much needed changes in US taxing policies. John Kennedy became somewhat famous for his tax cuts that resulted in increased government revenues.
Even if Trump comes up with the right formula, it will take years for an improved economy to increase tax revenues, meaning massive deficits for years to come. Even then, there’s no guarantee that the deficit will ever by eliminated.
Inflation is already reading its ugly head, and the fear of inflation will drive more investors to gold and silver. Only a major war would send more money into gold.