I am going to write 3, maybe even 4, blogs (we'll see how busy I am which will dictate whether I am able to write them one each day consecutively, or not) on our views on macro (big picture) events around the world and how we are positioning our portfolios to match our views.
First, I will start in the East...India, to be exact.
Over the past month, India's Prime Minister, Narendra Modi, has demonetized (cancelled for legal tender...gonzo, scrapped) 500 Rupee and 1,000 Rupee notes. The chief aim of this demonetization of these specific notes is to clamp down on the "black" market in India.
One of my office-mates is married to an Indian woman so I have learned a little bit over the past month about the Indian economy. The first thing to learn is that...it is extremely corrupt, at least from a black market point of view. There are estimates that the black market of the economy makes up 25% of India's Gross Domestic Product (GDP) but my friend Robert thinks that estimate is probably low. It is so bad there, that they have terms for their currency: 1) White Rupees and 2) Black Rupees (I leave it for you to guess which one is taxed and which one avoids tax).
It would appear the Rs500 and Rs1,000 notes are the most common notes (~C$ 10 and 20 respectively) used in the black market so stripping them out of circulation, puts pressure on the operational effect of the black market. This is Modi's idea of a movement from a cash currency economy to an electronic/digitalized economy. His hope is that it would at least help remove the further growth of the black market.
But where this might get interesting is the effect on Gold. I knew India was a society that valued gold due to jewelry demand, especially as wedding gifts. What I wasn't informed on as much was the dynamic of Indian jewelry demand, combined with safe haven demand. It is reported that India is the largest importer of gold at around 700 tonnes per year...some for jewelry, some because they want a store of value (and rightfully so, given what is happening to their currency).
And on top of that, there were rumours circulating in India last week that the next move out of Modi on his crack-down on the black market was to ban the importation of gold. That rumour was since denied (sort of) by the authorities but the price of gold in India is skyrocketing. Should they actually ban Indians from buying gold imagine what that would do to the price of gold outside of India? 700 tonnes of gold would be floating around looking for a home. I could imagine the price of gold, which has likely been getting hit over the past week or two on this potential, could possibly drop $100-200 in a day.
So to conclude our views on India and how it might affect our portfolios, we remain flat gold producers. We will keep our powder dry because if that event occurs, and for the reasons it is occurring (because a government just demonetized part of it's currency) we will want to own some gold.