Why Gold is Damaging to the World’s Economy

 This article is written by Sharif Rahman, the co-author of 259 Trillion Vs 5 Trillion book series. It was translated from his latest book, specially designed for Malaysians Muslim.  However, non-Muslim are most welcomed to read it, either by skipping chapter one or by reading it as it is to understand the inner workings of Muslim Gold Bugs.  The book is written entirely in Bahasa Melayu and an interesting portion of it is translated here into English for everyone’s reading pleasure.  The title of the e-book is “Kegagalan Emas Sebagai Aset Pelaburan” and is  available for order.  For previews and sneak peek inside the 300pages new e-book, go here (http://sirikegagalanemas.wordpress.com).

This article is adapted from the chapter “Mengapakah Emas itu Merosakkan”, about the Indian Rupee (which is a hot topic right now) and why it crashed.

[page 230 – 241]

Translation starts:

Let’s now look from an economic point of view (after it was shown why gold cannot be hoarded in Islam based on the Quran), what are the impacts of gold purchases and then of its hoarding.  Many Islamic scholars and Ulama who were not knowledgeable in the realms of economics, issued statements that using and keeping gold, would help the economy of the ummah.  It is like a “demi-god” to them.  Simply store and hoard.  Their statements are far off the mark, for they have no proof to back their silly claims.  Only by being smart and by working hard every day, plus with the help of God that an ummah can be rich and strong.  Gold would in fact ruin the ummah, if only they knew.  The more they buy (and keep), the worst off the ummah would be.  Since the scholars and the ulamas made many statements without proof, now I will show all of you the readers, the proof, and I am sure it is not to their liking.

We shall explore the economic performance of that of India, the largest buyer and hoarder of gold in the world.  India is categorized as a poor nation because each of its constituents are earning less than USD2,500, a year (Malaysians are USD15,000).  If we count their entire wealth, their wealth would be about USD4,000 for each man, woman and child.  If compared to the United States (which I had shown in my previous book series through a lengthy calculations that it is the richest nation on the planet), India is very far behind.  Americans per capita wealth is easily exceeding USD200,000 (or USD800,000 if all tangible and intangible are counted).  If India wanted to match America, they will need to work nonstop at least for the next 80 years, and keep every single cent they make without ever consuming any of it.  Since this is not possible at all, then in reality, India is behind by more than a hundred year!

Sadly, despite their poor economic conditions, India is also the world’s largest buyer of gold.  They bought a total of 1,079 tonne in 2012 according to the Reserve Bank of India.  This is a lot of gold, in fact it is triple than America’s own purchases! India consumed as much as a quarter of all of the world’s gold production.  Further, their gold demand has been increasing through the roof, which is an area of contention for the central bank.  India diverted so much of their income and wealth into buying useless gold, that now their economy is starting to bear the brunt of repeated lost productivity and lost economic opportunities because scarce resources were diverted into something that is simply stored in metal boxes.

Since the year 2000, India has tripled their gold purchases, and has been making record new purchases every year for the past few years.  The worst part is, India has been buying these record quantities of gold at a time when the very price of gold, has shot up many folds.  In essence, their purchases has increased by six times or more, in monetary terms if the increase in price is taken into account.  Surely, these large purchases (these piles of gold are simply stored and hoarded) would soon bring their economy into trouble.  Indeed, it has and within just a few short years, their economy wobbled.

Starting in late 2012, the Rupee started to go down in value.  The value of Rupee kept on dropping and kept on breaking new lows repeatedly, while the gold bugs (including those Muslims gold bugs who wanted to bring back the Islamic gold Dinar) kept saying that the reason the Rupee is falling down is because of the inherent problem with ‘useless’ paper money.  They kept saying it is problematic and not good.  How wrong they were! They are so blind; the reason for the Rupee’s fall is actually none other than they themselves, who kept on buying more and more gold and expect they would somehow become rich.  They are destroying their own economy.  It is not the Jew, or anyone else who is doing it.  They can use whatever kind of currency, whether paper based or commodity based or just about any other ‘religion ordained’ currency, those currencies would still go down just as much, if they bought record amount of useless gold and then hoard all of them.  They are becoming poorer, not richer.  This is the economic fact and the economic truth.

Gold & Indian Rupee

(Data sourced internationally for the Rupee exchange rate)

Reserve Bank of India (the RBI) and the Indian government had appealed to the public to stop buying gold.  This is a rare event in the history of the world, yet here it is.  This evidence is occurring right in front of everyone’s eyes and it is a big smack in the face for these gold proponents.  The RBI went further and banned companies from buying gold outright, because the crisis was becoming deeper and was starting to affect the general economy.

Gold & Indian Rupee

The purchase of gold became uncontrollable as reflected in this RBI chart, the source of the Indian malaise. (Sourced from RBI Report)

Gold & Indian Rupee

The value of Rupee And Gold Purchases.  Data obtained from World Gold Council and the Reserve Bank of India

These charts show that the more gold they bought, the worst off they become.  They are making themselves poorer.

Gold & Indian Rupee

Chart Translation: Value of Rupee and the percentage increase of gold purchases. Sourced from the RBI.

 Gold and Indian Rupee

Pray that eventually they will stop their large gold purchases because it is destroying their economy

 India’s current account deficit has increased tremendously causing their currency, the Rupee, to fall.  Notice that in just a few short years, due to the large gold purchases, their deficit has grown to RM249 billion a year!  For the year 2007 until 2008, the ENTIRE current account deficit is due to gold purchases.  From then on, on average, 80% of the deficit is due to gold purchases.  India buys most of their gold from overseas by surrendering their natural resources and hard earned income to foreigners.  Who say that buying lots of gold would make a country rich? Or more advance? Not True! In fact, getting poorer would be the end result.

For decades, Indians had been buying gold and hoarded them in their houses and temples.  Up to today, it is estimated that a total of 18,000 tonnes of gold is being hoarded in India, worth an amazing RM3.06 trillion in 2012!  (based on World Gold Council data).  Reuters on the other hand reported a larger number, as much as 31,000 tonnes, hoarded inside Indian homes and temples.  That’s just trillions of dollars of hoarded ‘useless’ metal, not generating anything for their owners.  In Reserve Bank of India special report regarding gold, they proposed that the government imposed a tax on all gold purchases, in order to reduce the deficit and discourage imports.  This proposal was accepted and the government imposed the tax starting in 2013, and so far this year, the government had increased this gold-tax three times, due to the Rupee’s free fall.  In the central bank of India (RBI) special report, they also mentioned that after a ‘thorough’ analysis of gold prices historical data spanning more than three decades, they came into a conclusion that a sudden large scale drop of gold’s price is extremely remote.  Therefore all gold purchases made on credit, and all pawn services (similar to ArRahnu in Malaysia) would not go bankrupt if there is a big retreat in gold’s price because the chance for it to occur is very remote.  The bank listed down that billions of dollars are outstanding in the economy and all of these credit are based on the price of gold.  One of the largest issuer of such lending are the country’s multitude of banks and gold related financial institutions.  RBI said that the chance for gold price to drop by 30% or more in the next three months is a mere 0.1%.  To drop that much in the next six months, the probability would only be a really low number of only 0.2%.

They couldn’t be more wrong.  Indeed, as soon as they published their report, gold’s price started to fall, and it fell by more than 30%, in the few months that they said it could not have happened.  Despite purchasing additional 470 tonne of gold in the first six months of 2013, the large drop in the price of gold has devalued the entire gold holding of Indians by an amazing 500 billion ringgit (almost equal to the entire GDP of Malaysia).  Despite buying more gold, the value of gold in their hands is now only 2.5 trillion ringgit.  Surely many gold hoarders, the gold dinar proponents and all other gold bugs could not sleep well at night knowing they have not make a single cent since the year 2011! And now they are stuck with bars of useless metal and could not sell it off to other people, unless they take a big loss.

I decided to conduct an analysis of the very same data analyzed by the RBI that concluded that the chance for gold’s price drop of such magnitude is extremely remote.  My analysis discovered that the reason that they were caught off-guard is that whenever gold’s price goes up by 25% or more within a two year period, the chance for it to go down by 30% or more, is a very high number of 75%.  This fact was never taken into account by the RBI.  This event occurred several times in history, and the most recent was in 2011 when it went up spectacularly.  Within one a half year, gold retreated significantly.

I have written back in 2011 (in online forum) that gold’s price would only go up to USD2000/oz before freefalling back to its minimum “floor” level of USD1,250/Oz (with data available at that time).  My warning was met with laughter because they were so disillusioned with their shining gold bars and the notion that it will go up and up for eternity.  Fortunately, several attentive readers did heed my warning and they were spared the horror.  As it turned out, none of the gold bugs made any meaningful return since 2009.  As published in the last book of the 259 Trillion Vs 5 Trillion series, we have shown how we arrived at that specific number and indeed gold price fell in 2013 to that level and has hovered there since, waiting for the next impetus.  And the second impetus is already here, it’s the decline of the Indian economy.  Just a small decline in the economy of India is enough to pummel’s gold’s price to a very low level.  The next impetus is certainly that of China.  If China economy tanks and gold demand drops further, then the current support at USD1200/oz would be broken and the price would crashed to the next support level.  New data suggest that the next support price would be around USD800/oz (next highest mine floor cost) as all the current expensive mines would stop production (they indeed has closed down all of the expensive mines according to latest reports).

Imagine for instance, what would happen if India invests its hard earned incomes into shares of good companies in the stock market the world over? Would they end up richer? Assuming they could get a return of 12% a year on their investments, Indians could obtain RM320 billion a year on their 2.5 trillion ringgit if it is invested into shares of good companies the world over.  That is more than enough to cover all of their current account deficit, with some leftover as a surplus.  Should they never have bought gold in the first place all of this while, they could have bought 70 million high quality cars, directly from the United States, consuming the US’s entire car production for nine consecutive years!

If Indians used their money to buy oil instead and not gold, they could have bought as many as 8 to 10 billion barrels of oil (Indian entire proven oil reserve is only 5 billion barrels and Malaysia is only 3.5 billion barrels).  If they decided to buy tablet computers and Ipads, they could buy as many as 2,700 million tablets, enough to give two, to each of their citizen.  This would surely give their economy a very big boost in terms of productivity and education.  Should they simply go and buy books with this vast sum of money, they could have bought as many as 32 billion books, giving each Indian as many as 27 books.  Again, this will move their economy into a whole new equilibrium, with a much greater potential.  This will provide a great impetus for growing their economy extensively over the next decade, and longer.  India could use their money to build roads, schools and many other needed infrastructure to permanently upgrade their economic potential.  This is the real road to wealth.  Not by buying gold and keeping them and then wishing and hoping its price would go up and up (for no reason).

If only their politicians are smarter, they could have reduced their dependence on imported oil for energy (as much as four fifth of their oil need is imported) by buying solar panels and generate as much as 500 GW of electricity, every day.  This is bigger than Malaysia’s entire electric generation capacity of just 20 GW.  If only they did not hoard gold, they would be far richer today, than ever.  Not just they would not have a large current account deficit, they would be generating additional income by exporting electricity to Bangladesh and Pakistan.  Everyone on their subcontinent would be better off, but if only they did that.  Unfortunately this was not the case.  Such is the curse of hoarding gold, that all  should stop and reflect on themselves, why they are keeping those useless metals in safety boxes for no economic return whatsoever.

Gold and Indian Rupee

Which is more valuable, gold or solar panels?

 Every Indian keep on average, 20% of their wealth in gold.  For the next ten years, Indians would lose more than 800 billion ringgit, A YEAR, on an investment that would be worth as much as 8 trillion ringgit, if they sell all of their gold holding and invests the proceed into useful activities.  In just 20 short years, Indians would reap a return of 2.6 trillion ringgit, A YEAR, on an investment valued as much as 24 trillion!  This is how they can catch up to America, in fact it is the only way for them to catch up.  All other Muslim nations should also take note.  Gold will not make them rich no matter what.  Because India did not liquidate their gold and sell it off and would rather keep all of their gold well hidden, each Indian would stand to lose as much as 5 thousand ringgit a year (420 ringgit a month), for eternity and this value would just keep creeping up.  Such is the cost of lost economic opportunities.  As long as India keeps on diverting their precious hard earn income into the purchase of useless gold, they would not be able to break free from poverty as easily as they thought they could.

In the 1990s, Indian economy was in trouble and they had to ask for a loan from the IMF and the European nations.  India had to give up 60 tonnes of their gold holdings as collateral for the loan.  The gold was secretly flown out of the country due to the stigma of discovery.  Unfortunately today the situation is far worse.  They bought lots of gold at high prices, and selling them now would surely result in large losses.  They are indeed stuck between a rock and a hard place.

Gold and Indian Rupee

The former governor of the Reserve Bank of India, who just recently was replaced.

 World’s famous economists such as Milton Friedman and Lord Keynes has attributed the Great Depression to the problem of gold’s supply (and demand).  Gold has consumed world’s prosperity again and again, and it must be prevented from doing so all over again.  We shall discuss in the second twin book, on why gold can never be a good currency in our modern economy of today.

End of Translation.

Read more by ordering the e-book through author website.


[{Sharif Rahman is the co-author of 259 Trillion Vs 5 Trillion book series and on a book explaining the Occupy Wall Street movement. He can be contacted at his email at [email protected] The books are available in Amazon.com and for Malaysians who are interested to buy the digital versions, please contact him on purchase information.  His latest book and its upcoming twin book are especially written for all Malaysians, utilizing local economic data to banish gold bugs for good.}]

Leave a Comment

  • Joe 25th October, 2013, 7:15 am

    Sharif’s analysis is based on one very flawed assumption in that the world’s fiat currency will retain its value infinitely. The continuous printing of paper money in the US, without being backed by something tangible or fundamental value, will eventually reduce the fiat currency to just toilet papers. At the moment when the world’s currency fall, the gold will increase not because of its intrinsic value but simply a relative valuation to the fallen value of the currency.

    We have to look a little further into the future not only the current and now.

  • Sharif Rahman 25th October, 2013, 3:17 pm

    Thank you Joe for your comment! Fiat paper dollars are always compensated for losses in value. This is explained in Pg85 onwards in the book. It is a nice piece that i called, The Roti Canai Conundrum! Why is it a conundrum? People who does not understand keep saying that roti canai is cheaper a long time ago, but is now more expensive. Despite complaining, they could afford to buy more than their fathers could, a long time ago. The real roti canai price was calculated and shown.

    Also the us dollars is said to have lost 95% of its value over 100 years, yet the Americans are still the richest, are they not? (this is why they can keep on printing). In fact when compared to our ringgit, didn’t their currency remain valuable or more than ours since 1998?

    Regarding money printing, this is explained in my blog, why the Fed resort to money printing. The explanation was money was disappearing from the economy when loans were paid off.

    Japanese Yen continuously goes up in value over the last decade or more. It is not true fiat money always loses value. Without the Fed’s money printing, the USD would have gone up in value, tremendously, so they just keeping it even (but gov surely benefits!).

    Regarding toilet papers, this is explained in the book, it is very detail. Fear not, this will not happen if the Fed or the BNM is allowed to do their job.

    And finally you mentioned that gold’s price increase is due to the fall in fiat currencies. This is the bull that so many people fall for. Just look at gold’s price in the last few months, it dropped like a brick, but fiat currencies value remain stable and did not go up. Now with this drop, can anyone go and buy one kambing with their gold dinar now? Maybe a small one they could have; so this is another bull widely purported by gold loving people that their gold always remain constant in value. In reality what happen to gold’s price has little to do with fiat paper money.

    I predicted what will happen to gold’s price back in 2011 (i told them gold will only reached 2,000 but nobody believed me) and it will dropped to 1250 (now they believed me). So what do you think will happen to your gold holding now? Lose more money on it? Or pray that it will go up? Who will push it up and because of what?

    All of these questions and many more are answered in the book!
    Many people do not understand what money really is and they always say that our paper money is not backed by anything. This is a big misconception. Every single ringgit out there, is backed by real asset in the economy. If you don’t believe it, calculate it! This is what i did, together with another author and we published it in our book (that’s book3 of 259 Trillion series for the US economy).
    And btw, I also calculated the real intrinsic value of gold and presented that in the book. Don’t simply claim gold has value unless you show us the calculations.
    I would welcome any other comments or you may email me your personal questions.