Other People’s Money

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?.

Why smart people fall for Ponzi schemes

ponzi
Sometime back a friend called and had a rather peculiar question. He wanted to know how he could go about stopping one of his friends from peddling a Ponzi scheme.

This was a rather tricky question. Just explaining to someone selling a Ponzi scheme that he is selling a Ponzi scheme, does not really work. The first question I asked my friend was how was his friend doing in life? “He is doing well for himself,” said my friend with a chuckle. “He works in a senior position with a corporate and has managed to sell the scheme to at least ten people in the housing society that he lives in.”

“If he is working at a senior position, why is he doing this?” I asked my friend, and immediately realised that I had asked a rather stupid question. “I was hoping you would be able to answer that,” my friend replied.

This column is an outcome of that conversation.

Over the last ten years of writing on Ponzi schemes I have come to the realisation that many people who sell and in the process invest in Ponzi schemes are not just victims of greed or a sustained marketing campaign, as is often made out to be.

There is much more to it than that. Many individuals selling and investing Ponzi schemes (like my friend’s friend) come from the upper strata of the society, are well educated and know fully well what they are doing. In case of my friend’s friend he was selling a multilevel marketing scheme for which the membership fee is more than Rs 3 lakh. So, the scheme is clearly aimed at the well to do.

On becoming a member you are allowed to sell products, some of which cost as much as a lakh. Of course, you will also be making new members as well. The bulk of the membership fee paid by the new members you make, will be passed on to you. Hence, the more people you get in as members, the more money you make. Selling products is just incidental to the entire thing, given that a membership costs more than Rs 3 lakh.

This is a classic Ponzi scheme in which money being brought in by the new investors (through membership fee) is being used to pay off old investors (who had already paid their membership fee), with the business model of selling products providing a sort of a façade to the entire thing.

So, the question is why does the smart lot fall for Ponzi schemes? As John Kay writes in Other People’s Money—Masters of the Universe or Servants of the People: “Even if you know, or suspect, a Ponzi scheme, you might hope to get out in time, with a profit. I’ll be gone, you’ll be gone.”

People feel that the money will keep coming in. Or what the financial market likes to call ‘liquidity,’ won’t dry up. And this is the mistake that they make.
Kay defines liquidity as the “capacity of the supply chain to meet a sudden or exceptional demand without disruption…This capability is achieved…in one or both of two ways: by maintaining stocks, and by the temporary diversion of supplies from other uses.”

Kay in his book compares the concept of liquidity to the daily delivery of milk in the city of Edinburgh in Scotland where he grew up. As he writes: “In the Edinburgh of fifty years ago fresh milk was delivered everyday…At ordinary times our demand for milk was stable. But sometimes we would have visitors and need extra milk. My mother would usually tell the milkman the day before, but if she forgot, the milkman would have extra supplies on his float to meet our needs. Of course, if all his customers did this, he wouldn’t have been able to accommodate them.”

What is the important point here? That people trusted the milkman to deliver every morning. And given that they did not stock up on milk, more than what was required on any given day. If the trust was missing then the system wouldn’t have worked.

Take the case of how things were in the erstwhile Soviet Union. As Kay writes: “In the Soviet economy there was no such confidence, and queues were routine, not just because there was an actual insufficiency of supply – though there often was – but because consumers would rush to obtain whatever supplies were available.”

And how does that apply in case of Ponzi schemes? As I mentioned earlier, the individual selling Ponzi schemes feel confident that the money will keep coming in. Those they sell the scheme also become sellers. And for the Ponzi scheme to continue, the new lot also needs to have the same confidence.

In the milk example shared above, if people of Edinburgh had started hoarding milk, the liquidity the system had would have broken down. The confidence that milk would be delivered every day kept the system going. Along similar lines, the confidence that money will keep coming into a Ponzi scheme, gets smart people into it as well.

Of course, this confidence can change at any point of time. And if a sufficient number of people stop feeling confident, then the scenario changes. The money coming into the Ponzi scheme stops and the moment the money coming into the scheme becomes lesser than the money going out, it collapses. So that’s the thing with liquidity, it is there, till it is not there.

In my friend’s friend case, members down the line would stop making more members. Also, members who had bought the membership from my friend’s friend are likely to turn up at his doorstep and demand their money back.

And given that he has told membership to many people in his housing society, he can’t just get up and disappear, given that he is essentially not a scamster. He is a family man with a wife, children and parents, who stay with him.

Hence, he will have to refund them, if he has continue living in the housing society in a peaceful environment. How will he do that? Let’s go back to the definition of liquidity as explained above. Liquidity is maintained by “by maintaining stocks, and by the temporary diversion of supplies from other uses.” So my friend’s friend can pay up from the money he has already accumulated by selling these Ponzi schemes. If that is not enough, he can dip into his savings. And if even that is not enough, he can hopefully take the money being brought in by the new members (if at all there are people like that) and hand them over to the members demanding their money back.

Of course, by doing this he will only be postponing the problem, given that he would have to later deal with the new members.

Long story short—he is screwed!

The column originally appeared on The Daily Reckoning on Oct 13, 2015

Why we buy lottery tickets

lotteryThe funny thing about memories is that we remember what we remember. And those memories may not always be a true reflection of how things may have originally happened. What we live with are our versions of how things may have really happened. And this we tell ourselves is the truth.

One abiding memory that I have from my childhood is that of my father buying lottery tickets. I don’t remember how often he did it. Neither do I remember how long he did it for. But I do remember that there was a time when he used to buy lottery tickets regularly. And in my version of this memory, I remember him beaming on days he used to buy a lottery ticket. He looked genuinely happy on those days.

And all these years later, I wonder why he smiled on the days he bought a lottery ticket, given that he never really won anything. Of course, I did not understand the reason back then, but now with some understanding of why people behave in a certain way, I do.

As John Kay writes in Other People’s Money: “A lottery ticket, which millions of people buy each week, is a wager. Cynics have advised that you would do well to buy your ticket at the last minute, because otherwise the probability that you will die before the draw is greater than the probability that you will win the headline prize.”

Jokes apart, why do individuals actually buy lottery tickets, given that the probability of winning the big-prizes on offer on any lottery, is very low. Only a few people out of the millions who buy lottery tickets regularly, are likely to win the top prize.

Psychologist Daniel Kahneman explains this in Thinking, Fast and Slow: “The possibility effect…explains why lotteries are very popular. When the top prize is very large, ticket buyers appear indifferent to the fact that their chance of winning is minuscule.”

The point being that unless you buy a lottery ticket you have no chance of winning. As Kahneman points out: “A lottery ticket is the ultimate example of the possibility effect. Without a ticket you cannot win, with a ticket you have a chance, and whether the chance is tiny or merely small matters little. Of course, what people acquire with a ticket is more than chance to win; it is the right to dream pleasantly of winning.”

And that I guess explains my father’s beaming face every time he bought a lottery ticket. In fact as Kahneman puts it: “Buying a ticket is immediately rewarded by pleasant fantasies…The actual probability is inconsequential; only the possibility matters.”

In fact, promoters, companies and governments (as is the case in India and other parts of the world) which sell lottery tickets, understand this fact very well. As Kay writes: “Promoters have learned through experience how to design an attractive lottery product. A few very large prizes establish the dream. A large number of very small prizes encourage customers to maintain the belief that ‘It could be you’.”

This structure of the lottery also explains why people keeping going back to buying tickets even though their chance of winning the big prize is close to zero. As Kay points out: “When lottery patrons lose, as they mostly do, they can sustain the dream by promising themselves that they will buy a ticket again next week. ‘It could be you’ was the well-judged slogan with which Britain’s national lottery was launched.”

So, the story and the hope of winning a big lottery continues among millions of people all over the world. And it is hope which makes a dull and dreary life, liveable at the end of the day. If that means buying a lottery ticket, then so be it.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared in the Bangalore Mirror on Oct 7, 2015

The robber barons of India

rober barons

In his latest book Other People’s Money—Masters of the Universe or Servants of the People?, the British economist John Kay talks about the robber barons of the United States, who lived through the late nineteenth and the early twentieth century.

As Kay writes: “The late nineteenth century is described as ‘the gilded age’ of American capitalism. The dominant figures of that era – men such as Henry Clay Frick, Jay Gould, J.P. Morgan, John D. Rockefeller and Cornelius Vanderbilt – are often called the ‘robber barons.’”

These robber barons helped build the railroads, oil supply systems and steel mills of the United States. As Kay writes: “They were both industrialists and financers, in varying degrees…But their immense personal wealth was as much the product of financial manipulation as of productive activity.”
Now replace United States with India, and you can see the similarities. While the United States had robber barons in the nineteenth and the early twentieth century, India has had them in the twentieth and the twenty-first century.

The Reserve Bank of India governor explained the finance skills of Indian businessmen in great detail in a speech he made in November 2014. As Rajan said: “The reason so many projects are in trouble today is because they were structured up front with too little equity, sometimes borrowed by the promoter from elsewhere. And some promoters find ways to take out the equity as soon as the project gets going, so there really is no cushion when bad times hit.”

What Rajan was essentially saying here is that many Indian businessmen start a project with very little of their own money invested in it. Further, some of them even manage to tunnel out this small investment as soon as the project starts. This is typically done by over stating the cost of the project, borrowing against the higher number and then tunnelling out a portion of the debt that has been taken on to get the project going.

Also, in the last few years, many Indian businessmen have taken on more bank loans than they could have possibly repaid. They have subsequently defaulted on it or renegotiated the terms, leaving the banks in a lurch. Interestingly, even after defaulting on their loans, they have continued to be in positions of control.

As Rajan said during the course of his speech: “In much of the globe, when a large borrower defaults, he is contrite and desperate to show that the lender should continue to trust him with management of the enterprise. In India, too many large borrowers insist on their divine right to stay in control despite their unwillingness to put in new money. The firm and its many workers, as well as past bank loans, are the hostages in this game of chicken — the promoter threatens to run the enterprise into the ground unless the government, banks, and regulators make the concessions that are necessary to keep it alive.”

And if after all this, the business comes back to health, the businessmen tends to benefit the most. As Rajan said: “The promoter retains all the upside, forgetting the help he got from the government or the banks – after all, banks should be happy they got some of their money back!  No wonder government ministers worry about a country where we have many sick companies but no “sick” promoters.”

These businessmen over the years have survived on essentially manipulating the system (or what we like to call jugaad) and surviving on multiple doles from the government. This is something that Rajan clearly pointed out in a recent speech, where he said: “India must resist special interest pleas for targeted stimulus, additional tax breaks and protections, directed credit, subventions and subsidies, all of which have historically rendered industry uncompetitive, government over-extended, and the country incapable of regaining its rightful position amongst nations.”

But this is easier said than done, given that India’s businessmen have always operated like this. The question is how can this change? Kay has a possible answer in his book Other People’s Money, where he suggests that the United States went from strength to strength after the links between finance and business were loosened.

As he writes: “While the ‘robber barons’ were both financers and businessmen, the leading industrialists of the first half of the twentieth century – men such as Alfred Sloan of General Motors and Harry McGowan of ICI – were primarily businessmen. Their skill was in developing the systems and cadre of professional managers needed to run a modern corporation.”

This is possible if banks go after corporates defaulting on loans with great zeal, which they currently lack. Further, a new class of capitalists needs to flourish.
The Prime Minister Narendra Modi in a recent meeting with India’s biggest businessmen asked them to increase their risk taking appetite. As the president of the Confederation of Indian Industry, a business lobby, told the media after the meeting with Modi: “Prime Minister has said that industry must take risk and increase investments…we must go out and invest.”

The trouble is India’s incumbent businessmen are not the risk taking type. As Dipankar Gupta wrote in a recent column in The Times of India: “Till the 1980s Indian businesses were shielded from foreign competition, and they returned this favour by not introducing a single innovation above street-corner jugaad…Even after liberalisation came to India in the 1990s, this risk aversion among Indian capitalists stayed firm and remained protected by a friendly state. This can best be seen in the advocacy and implementation of the current Public Private Partnership (PPP) model.”

Hence, expecting such businessmen to suddenly start taking risk is a tad absurd. That ain’t happening. So what is the way out? As I said earlier, India needs a new class of capitalists. And for that to happen, as Rajan said the other day, it is important “to improve regulation by focusing on what is absolutely necessary to create a sound business environment.”
The column originally appeared in The Daily Reckoning on Sep 22, 2015