Question: What would happen if India was the only exporter of gold?

Readers Question: What would happen if India was the only exporter of gold?

India would have a monopoly in the export of gold. Given the recent increase in the price of gold, this would lead to a significant increase in foreign exchange earnings for India.

If the export of gold was controlled by India, it is likely the price would rise even further. This is because there are few close substitutes to gold. Given the financial turmoil and concern over the US bond market, there has been a high demand for gold. High demand combined with limited supply would push prices higher.

There would also be an increase in demand for alternatives such as silver. At the moment, gold is seen as the most important precious commodity and is a barometer of the state of certain aspects of the economy. But, if supply was controlled from India, it would make the commodity less attractive. However, I’m not sure the extent to which investors could or would switch to alternative precious metals.

Effect on India Economy.

  • India would see an increase in foreign exchange earnings.
  • There would be an appreciation in the value of the Indian currency as foreign investors bought Indian gold.
  • There would be an improvement in the current account balance for India.
  • Higher standard of living. The appreciation in the exchange rate would make imports for Indians appear cheaper.
  • The government could levy a tax on gold sales to raise revenue.

Impact on Rest of World.

  • Given the rush to buy gold, this monopoly situation would create more uncertainty leaving investors struggling to find ‘safe havens’ for their investment.
  • Increase cost for industries where gold is used (conductor in high-end stereos) use in jewellery. However, the main demand for gold comes not from industry or practical use, but as part of an investment portfolio.
  • In theory, paper currencies are backed by gold reserves. More limited supply of gold would make it more precious.

Evaluation

  • It would depend whether there was a monopoly within India. e.g. would it be controlled by one company like De Beers (diamonds) or would there be competition within different Indian gold producers?
  • It also depends on how plentiful the supply of gold in India was.
  • If one country had a monopoly over a commodity like oil, the impact would be much greater. The industry can live without gold, but it can’t live without oil.

 

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