Policy

Sir, gold ka kya lagta hai?

(This cartoon has been generated through ChatGPT).

(The image has been generated using ChatGPT). 

Let’s start this one with an anecdote.

On February 1, while recording a video, the makeup guy on set asked me the quintessential Mumbai question, but with a twist: Sir, gold ka kya lagta hai? (Sir, what do you feel about gold)?

At its heart, it seemed like the most innocent of questions. I could have answered it by just saying: aur upar jayega (it will go up more) and gotten done with it. At that point gold was quoting at around Rs 82,000 for ten grams. On April 23rd, it was selling at around Rs 96,600 per ten grams.

But that’s my trouble in life. I am unable to say things which help people outsource their decisions and thinking to me. And that explains why I never got around to becoming a financial influencer even though I have the perfect profile for it.

As I usually do in such situations, I just smiled and said something along the lines of, ‘I can’t predict the future,’ before quickly shifting my attention to someone else nearby.

So, what’s the point of this anecdote? If you are the kind who is looking for clear and crisp explanations on gold – where I confidently predict that the price of the yellow metal will hit Rs 1,20,000 per ten grams by June or that it will cross $5,000 per ounce (one troy ounce equals 31.1 grams) by the end of this year or during the first three months of 2026 – then you are at the wrong place my dear. Please stop reading this immediately and do something better with your time, like scroll reels on Instagram.

So, what do I plan to write about in this piece? To put it simply, the price of gold has been going up primarily due to all the uncertainty that the American President Donald Trump has managed to build up in the global economic, trade and financial systems through his tariff tantrums.

Now, this is nothing new. The mainstream media has been talking about this for a while, with cliched use of phrases like global turmoil, global headwinds, global shock, etc. But what they haven’t managed to do is to explain how this uncertainty has ended up driving up the price of gold and how it makes any future predictions on the direction of the yellow metal very difficult to make.

That hasn’t, of course, stopped the folks in the business of managing other people’s money (OPM) from making bold predictions. After all, their job often involves bending the truth, especially in times like these when their audience craves clear, confident takes they can latch on to — effectively outsourcing their decision-making to the OPM wallahs.

I am not an OPM wallah and so, at the risk of reiteration, I don’t really need to make clear, crisp and confident statements about gold or anything else for that matter. But then I will try explaining to you what’s happening with gold in as few words as possible.

Or as Dmitry Grozoubinski writes in Why Politicians Lie About Trade, I will not rely on the density of the subject matter to peddle easy answers, simple narratives and misleading twaddle.

Here is a chat GPT summary before we start:

In a world craving certainty, one man’s ego has become gold’s best friend. As Trump’s tariff chaos rattles global trade, traditional safe havens like the United States (US) dollar and treasury bonds have lost their shine. Enter gold — the metal surging not from clear trends, but sheer confusion. This piece unpacks how political volatility, misguided protectionism, and economic noise are pushing investors toward gold, even as predictions remain murky. No bold forecasts here — just a grounded look at why uncertainty, not clarity, is the real driver. And why good investing is less about certainty and more about preparedness.

The uncertainty

Donald Trump has been trying to disrupt the way global trade has been carried out over the decades. Sure, it’s not the most perfect or even the fairest system out there — but then, very few large, complex systems ever have everything neatly figured out. But on the whole it’s a system which has worked reasonably well.

Trump — and a lot of his supporters, the Make America Great Again (MAGA) crowd — aren’t thrilled with how global trade has panned out. They see it as a big reason why manufacturing has shrunk in the US, taking a whole bunch of jobs down with it.

Now, take a look at the following chart. It plots the share of manufacturing in the American economy over the years. This makes the piece longer, but hang in dear reader, this is important context for what comes next.

Over a period of 20 years, the share of manufacturing in the American economy has fallen from around 13% to less than 10%. Trump and his administration plan to address this by implementing high tariffs on countries from which they import stuff. This, they believe, will lead to a situation, where companies will start manufacturing in the US again, and that in turn, will Make America Great Again.

Now, I have tried to explain in detail in other pieces which have appeared during April, why anything like that is not going to happen. Getting into all that detail isn’t really possible here, but I will summarise a few points.

1) Trump has been selling tariffs as an idea where the exporting country will pay taxes to the US government. That’s not how it works. Tariffs are paid by the importer, who in turn passes them on to the end consumer. Of course, the exporter may choose to absorb a part of the tariffs and choose to make lower profits, but the kind of tariffs that have been implemented, especially on China, that’s unlikely to happen. This basically means that the major cost of the tariffs will be borne by the American consumer, leading to higher inflation in the US economy.

2) Now, let’s say that the tariffs make imports unviable, so, won’t the American consumers end up buying stuff being made in America? America does not have sufficient capacity to replace many imports, especially when it comes to consumer durables, everything from cars to electronics.

3) Can’t America start building new factories to produce domestically? Yes, nothing stops them. But factories cannot be built overnight. They take time. Plus, the kind of flip-flops Trump has been indulging in, it’s very difficult to see entrepreneurs make large investment commitments. It might simply make more sense for them to wait out Trump’s term. Also, there is a question of human skills being available in volumes that are needed to carry out this kind of manufacturing.

4) One of Trump’s flip flops has been to leave out smartphones, computers, and certain other electronic devices imported from China from reciprocal tariffs, which at the time of writing this stood at 245%. A Fortune report points out that in 2024, the US imports from China of smartphones, laptops and the components needed to make them amounted to $174 billion. This works out to around 40 percent of their overall goods imports from China. If the 245% tariff had stayed, Apple’s business model would have been killed pretty fast, given that it still has 80% of its production capacity in China.

5) Further, it’s worth remembering that no one forced entrepreneurs to move manufacturing out of the US to other countries. They did so out of their free volition. Indeed, it was simply cheaper to produce stuff in other countries. Howard Marks founder of Oaktree Capital Management explained the other side of the equation in a recent note: “Between 1995 and 2020, US consumer durable prices declined by 40% in real terms.”

The point is that if all the stuff that the US imports is produced in the US again it will cost a lot more. Or as Marks put it: “Even if tariffs are set high enough in the future to render US-made goods cheaper than imports-cum-tariffs, the prices will be higher…than Americans are used to paying…For example…a smartphone made in the U.S. might cost $3,500.”

There are many more points that can be made here but we are nearly 1,400 words into the piece and we still haven’t started talking about gold. Dear reader, how you must love the guys who tell you everything clearly in 30 second reels.

Anyway, getting back to the point. The big risk here is that how do entrepreneurs rely on someone as non-serious as Trump. There are chances that he might withdraw the tariffs, coming under all the pressure that is being mounted on him. He has already made compromises on the China front by leaving out smartphones, electronics etc., from reciprocal tariffs. Reciprocal tariffs on all other countries have been suspended.

Further, there are chances that the next US president who comes along might withdraw the tariffs. Or that Trump might not last this term. Or that he might simply double down on the tariffs.

The point being that there is too much uncertainty in the situation. And that’s one thing that companies don’t like at all, especially when they are expected to set up new factories. Uncertainty hurts proper planning.

In fact, the reason businesses and businessmen try and get close to politicians – like many American billionaires have tried getting close to Trump – is because they don’t want their business to be impacted by any uncertainty or they want to be forewarned.

Trump’s actions have increased the uncertainty tremendously in the global economy and the trade system. In the end, Trump’s tariff tactics aren’t grounded in sound economics but in a distorted self-perception — his blind spot – he thinks he knows, but doesn’t. And in that dangerous gap between perception and reality, global economic stability is being held hostage to one man’s ego or the fact that he doesn’t know that he doesn’t know.

So, what about gold?

And this, dear reader, brings us to the yellow metal everyone keeps asking about.

In uncertain times money moves to gold and its price goes up. Now, that would be a very simplistic way of explaining things. Indeed, gold is a safe haven, but this time around things are a lot more complicated than just that.

The US dollar has an exorbitant privilege. The global financial system that emerged after the Second World War had the US dollar at the heart of it. This led to a bulk of international trade being carried out in dollars – like a bulk of oil is bought and sold in dollars.

Once goods and services were bought and sold internationally in dollars, countries also ended up with their international reserves being primarily held in dollars. (A self-plug: Anyone wanting to get into further detail can read the second volume of my Easy Money series of books.)

Essentially, while other countries have to earn dollars in order to pay for anything priced in the US currency, the US has the option of simply printing them.

This did one more thing. The US dollar also became a safe haven. Every time there was some big global economic or financial trouble money moved into the US dollar. In fact, I remember in 2011, when the safest triple AAA rating of the US was downgraded, money moved from other parts of the world into the US dollar. And this is how things worked, until this time around.

Now, what does it mean when we say that money moved into the US dollar? It basically means that investors, particularly large financial institutions, sell financial securities they had investments in – get dollars for them or convert that money into dollars – and buy US treasury bonds. Treasury bonds are financial securities issued by the US government in order to finance its fiscal deficit—the difference between what it earns and what it spends.

This is how in times of trouble money would end up in dollars and thus in treasury bonds. Once the demand for treasury bonds went up, their prices would go up as well. Once their prices went up their yield to maturity or the yearly return investors could expect if they bought the bond and held on to it until maturity, would fall. This is because the yield or the return on a bond is inversely proportional to its price.

Along with this money would end up in gold as well and drive up gold prices. But this dynamic has been broken this time around.

Why? The answer to this question is quite complicated, but I will try and keep it simple. With the uncertainty that Trump has managed to create, he is chipping away at the exorbitant privilege of the US dollar, and many large investors — including central banks — are probably not happy looking just at the dollar and the treasury bonds as a safe haven investment, like they used to in the past. This can be gauged from the fact that the return or the yield to maturity on the ten-year US treasury bond has gone up during the course of this month.

On April 4th, the yield had stood at 3.99%. It briefly even crossed 4.5%. At time of writing this on April 24th, it was at 4.35%. What does this mean? It basically means that there isn’t enough demand for these bonds. Hence, their prices are falling and the yield as a result has gone up. At the same time, the US dollar has also lost value against other major currencies of the world, suggesting that money might be moving out of the US.

So, the dynamic of the US dollar being a safe haven investment has actually been weakened this time around. And this implies that a lot more money is going into gold, explaining its rapid rise in price.

The future

On April 22nd, the price of gold briefly crossed $3,500 per ounce, its highest level ever. On April 23rd, the day’s lowest price was around $3,260, implying a fall of close to 7% from April 22nd’s high to April 23rd’s low.

Why did this happen? During the course of the day on April 23rd, talk about Trump reducing Chinese tariffs started to go around. There was also talk about the US reducing automobile tariffs. By the end of the day all of that was denied. As I write this on April 24th, gold touched the day’s high of $3,368 per ounce and is currently selling at around $3,340 per ounce, bouncing back up.

Indeed, uncertainty has driven up the price of gold, and it’s this uncertainty that makes it very difficult to predict its future course with any certainty. What Trump might do and say on any given day depends on which side of the bed he gets up from. Or people speculating about which side of the bed he has gotten up from.

So, where does that leave us? It brings me back to the points that I keep making. Proper asset allocation is the most important thing in investing. Also, you can’t start planning for uncertainty once uncertainty strikes. Which is why, at any point of time, it’s as important to have money invested in bank deposits, in gold, as it is to have money invested in stocks and equity mutual funds.

Of course, this comes at a cost. Take my case. The weighted average investing period of my investments in gold mutual funds is currently around 1,765 days. For much of this period, if I had this money invested in Indian stocks, it would have probably grown more. But then stocks started falling since September and gold started going up. Off late, both stocks and gold have been going up. And honestly, I can’t see the future, like many OPM wallahs claim to.

In the end, gold’s rise isn’t about certainty — it’s about chaos. It reflects a world where traditional safe havens are fraying, and where ego often trumps economics. I won’t pretend to know where gold goes next, because that’s not the point. What matters is recognizing that unpredictability is now a feature, not a bug, of the global system, at least until Trump is around. And the only real hedge against uncertainty is preparation — through diversification, discipline, and resisting the urge to chase headlines. So no predictions here. Just a reminder: don’t outsource your thinking. Especially not to someone trying to sound certain.

Oh, if the makeup guy asks again, maybe I’ll just smile — or hand him this piece. Of course, he will ignore it and keep watching reels and then ask me: Sir, gold ka kya lagta hai?.

Vehicle Scrapping Policy is Half-Baked and More About Feeding a Constant Narrative

Late last week the central government announced the vehicle scrapping policy (VSP). As the Minister for Road Transport and Highways, Nitin Gadkari, put it in the Parliament, the aim of the VSP is to create “an eco-system for phasing out of unfit and polluting vehicles”.

So how will this be put into action? Using the public private partnership (PPP) model involving the state governments, private sector and the automobile companies, the central government plans to promote the setting up of automated fitness centres (AFCs). 

These AFCs will issue vehicle fitness certificates to private vehicles and commercial vehicles based on “emission tests, braking, safety equipment among many other tests which are as per the Central Motor Vehicle Rules, 1989.”

A commercial vehicle which is 15 years old and fails the vehicle fitness test will be declared an end of life vehicle and scrapped. Similarly, a private vehicle which is 20 years old and fails the vehicle fitness test will be declared to be an end of life vehicle and scrapped. Further, if owners don’t renew the registration certificate, their vehicle may be declared as an end of life vehicle and scrapped.

In order to disincentivise commercial vehicle owners who own vehicles which are 15 years old, from continuing to use them, even if they clear the vehicle fitness test, the fee for the fitness certificate and the fitness test will be set on the higher side. For private vehicle owners with vehicles which are 15 years old, the re-registration fee will be set on the higher side.

The point being that if you have a private vehicle which is 20 years old or perhaps even older, the government wants you to stop using the vehicle and buy a new one, irrespective of what state it is in. For commercial vehicles, the same logic applies for vehicles which are at least 15 years old.

And the expectation is this will lead to lower pollution, newer cars, safer pedestrians, more spending, more investment and more jobs. QED.

The minister expects additional investments of Rs 10,000 crore and 35,000 job opportunities to be created because of this.

It will also lead to banks and non-banking finance companies (NBFCs) giving out more loans. Of course, given that the auto industry and the auto-ancillary industry use a lot of contract workers, one could possibly argue that this could lead to more work opportunities for them as well. 

The question is how will things really play out? Let’s try and understand that in some detail.

Economics is basically the study of incentives and second order effects. The trouble is that politicians and policy makers don’t keep this in mind while designing policy, particularly the second order effects of what they are proposing.

Let’s try and understand this pointwise.

1) There are a total of 1.02 crore vehicles, both commercial and private, which fall under the defined category of older vehicles. Even if a small proportion of these vehicles are scrapped they will generate a huge amount of non-biodegradable waste.

What plans do we have to handle all this waste coming our way? As the press release announcing the policy pointed out: “Efforts are also being made to set up Integrated Scrapping Facilities across India.” Even while taking into account that this policy will be implemented over the next few years, this sounds too much like work in progress than definitive economic policy. One needs a lot more clarity on this front. 

2) As a way to get the scheme going, the government first plans to scrap its older vehicles. As the press release announcing the plan puts it: “It is being proposed that all vehicles of the Central Government, State Government, Municipal Corporation, Panchayats, State Transport Undertakings, Public Sector Undertakings and autonomous bodies with the Union and State Governments may be de-registered and scrapped after 15 years from the date of registration.” This is supposed to be implemented from April 1, 2022 onwards, or little over a year from now.

Why have this blanket policy at a time when governments, in particular state governments, are already short of money? Why not look at the fitness of vehicles and then decide? If at all, vehicles of the central government and the public sector enterprises tend to be decently maintained.

3) Also, the assumption here is that only older vehicles cause pollution. The manufacturing of newer vehicles needs electricity. Most electricity in India is generated by burning coal, which causes pollution. Steel goes into the making of vehicles. The process of making of steel, releases carbon dioxide into the atmosphere. That causes pollution as well. The same is true of plastic and pretty much everything else which goes into the making of vehicles. Hence, every new vehicle that is produced has a carbon footprint. 

Of course, all this pollution doesn’t show up in cities where most private vehicles are driven and tends to be well distributed across the country. But shouldn’t a policy that has lower pollution as one of its key points, take this basic factor into account as well? Further, we need to consider the fact that many older private vehicles are not constantly in use. 

4) As I have explained earlier, the government wants private and commercial vehicle owners to buy new cars. Of course, as and when this happens, the automobile companies are supposed to benefit. This explains why companies have come out in favour of this policy (or even otherwise, when do Indian businessmen ever disagree with the government). But this doesn’t take a very basic factor into account.

Whatever we might like to say about the new India and such things, we are a poor country at the end of the day. And covid has only made things even more difficult by pushing many more people into poverty, as health bills have mounted, incomes have crashed and small businesses have gone bust.

Hence, assuming that people will go out and buy new vehicles if the older vehicles are scrapped or because re-registration is made more expensive, is just looking at first order effects of policy, in the same way that economists tend to believe that lower interest rates always push up consumption. 

Private vehicle owners who are not heavy users of their vehicles, might just prefer to use Uber or Ola or even the metro infrastructure coming up across India’s major cities. (This reminds me of a time when the government kept telling us that slower automobile sales were primarily because of Uber and Ola).

Further, owners might financially not be in a position to buy a new vehicle. Already, the trucking industry has spoken up against the idea.

Also, even if owners buy a new vehicle, they might cut consumption on something else given that there is only so much money going around. Hence, net-net, the impact on the overall economy may not be much.

The trouble is that the costs of second order effects are not so obvious and straightforward, whereas the supposed benefits are easy to convey in a simplistic way. And politicians love stuff which they can convey in a simplistic way.

5) Kitna deti hai (how much does it give?), goes a Maruti advertisement, telling us that Indians are price conscious value for money consumers. And there is nothing wrong with this, given that an automobile is probably the second most expensive thing we buy during our lifetime. So, while the idea that old polluting vehicles need to be discarded is a noble one, what is in it for the consumer?

This is what the government is planning. a) The owner will be paid 4-6% of the showroom price of a new vehicle, when his old vehicle is scrapped. b) The state governments may be advised to offer a road- tax rebate of up to 25% for personal vehicles and up to 15% for commercial vehicles. c) The vehicle manufacturers are also advised to provide a discount of 5% on purchase of new vehicle against the scrapping certificate. d) The road transport minister has requested the finance minister and states to give a concession in goods and services tax (GST) on purchase of new vehicles.

There are too many ifs and buts in the above paragraph. As usual, the government seems to be in a hurry to announce and implement a policy. As I have said in the past a massive cut in GST on automobiles will encourage buying. What the government will lose out on per unit of sales, it is more than likely to make up for through volumes. 

One understands that the road transport minister cannot ensure all of this on his own, which is why it is important that the government spends some time in discussing and figuring out how to design and implement policy. Also, it is important to carry out small experiments in union territories, before announcing policies which need to be implemented across the length and the breadth of the country.

As Vijay Kelkar and Ajay Shah write In Service of the Republic: 

“The safe strategy in public policy is to incrementally evolve—making small moves, obtaining feedback from the empirical evidence, and refining policy work in response to evidence.”

But the trouble is that small moves involve a lot of time, effort and thinking, which is very difficult for a government which believes in constant action and constantly creating new narratives to keep people busy and happy. The narrative also feeds into the idea that the government is trying to do new things. 

6) Take a look at what happened to two-wheeler sales in 2019-20 (This is before covid struck). Sales fell by nearly 18% year on year to 17.42 million units, as the price went up due to various reasons. Hence, India is a very price sensitive market and the point is that there has to be a huge benefit involved in buying a new vehicle in a tough economic environment.

While the notion of pollution control is a noble one, it is not something which is going to get people to go out and buy new vehicles, unless it is very clear what is in it for them. Ultimately, if you want people at large to behave in a certain way, the right incentive should be on offer, something this half-baked policy, like the policy to encourage electric vehicles before it, lacks.

To conclude, one does wonder, what were they doing all these years, given that the policy has been on the anvil for a while now.