It is not about gold, it is about trust.

The government has raised tax on gold imports to 8% from 6% in an effort to stop people from buying gold. Will it work? Very unlikely. The international price of gold may fall further cancelling out the price rise but the real reason people buy gold is not because they are stupid or mad but because they have absolutely no trust in politicians. They have seen the current bunch presiding over scam after scam looting trillions from the economy while formulating a suicidal policy of social handouts just to win elections. The rupee has fallen to 57 to the dollar because of uncontrolled inflation, the Consumer Price Index rising at 9.8%. Instead of concentrating on inflation the government has forced the RBI to reduce interest rates because the banks are laden with bad loans and a low interest rate will allow companies to pay back high cost loans by borrowing at a cheaper rate. Trouble is that low interest cost just encourages business fellows to borrow even more so that the day of reckoning is just pushed a little to the future. Just because Fed Chairman, Ben Bernanke hinted that the Fed may slowly start to withdraw monetary easing bond prices have collapsed all over the world, raising yields. Bond prices rise when interest rates are low and fall when they rise so the markets are anticipating a rise in US interest rates sometime soon. The Fed is buying $85 billion worth of bonds every month which is a flood of cheap money. Some of that money is coming into our share market looking for higher yields. In May $4 billion dollars were pumped into our stock markets, the total for 2013 is $15.35 billion or Rs 832.05 billion. This and repatriation by Indians working abroad are holding the rupee up. Once the Fed starts tightening its monetary policy less money will flow into India and the rupee will drop further. If the Foreign Institutional Investors take fright at the weakening rupee and sell out our the fall could be catastrophic. In the last financial year profits of top 1100 companies fell by 5%. TOI, 6 June. Sales of Light Commercial Vehicles have fallen for the first time since April 2010. Livemint, 7 June. Combined sales of Tata and Ashok Leyland, which together command two-thirds of the market, fell by 10.9%. Mahindra and Mahindra, with much smaller sales, fell 19%. Since LCVs cater to urban and semi urban markets this means that demand for agricultural produce and services have fallen. Sales of multi-axle vehicles, which mirror capital expenditure have fallen by 50%. The Congress is determined to pass the Food Security Bill, by ordinance if necessary, which will add another Rs 2.5 trillion to expenditure. It is not about gold. It is about a complete absence of trust.