Folklore about silver and gold3 min read . Updated: 22 Aug 2012, 09:01 PM IST
Folklore about silver and gold
Folklore about silver and gold
Long back, in the country of Red Indians, there lived a wealthy family called Punt Brothers. They were running many businesses but it took a lot of hard work and a lot of time to make money. So they hired some wise men to recommend quick ways of making money. Wise men suggested leveraged trading to make quick bucks, they further suggested them to buy something with their initial capital and pledge that to borrow in order to buy more and keep on doing it till the time prices rise significantly. Though the wise men showed the way to enter the market, they did not show the exit route from the market.
The debt market was ruled out as central banks would not permit speculative trading beyond a limit. The equity market was ruled out as higher prices would create its own supply. The currency market was ruled out due to the size of the market. The commodity market looked attractive as supply was limited and demand was increasing. More importantly, no market participant was dominant at the time.
Far away in the mystic land, people were eating in silver utensils, wearing silver ornaments and worshipping silver idols. They did not mine much silver but imported from the rest of the world; a large part of these imports came to the desert port on boats. As silver prices rose and imports came down sharply, the boats slowed down initially. After a while, jewellery and utensils came out from closets from across the country to be melted in shops. Once again, boats started plying across the sea but now they were bringing gold and taking back silver. Increased silver supply from the desert port found way to the country of Red Indians. More and more boats started plying across the sea as demand for silver was huge even at high prices.
Punt Brothers had to buy more sliver to maintain the prices. As per their research, they were buying most of the known silver supply and could not understand how a desert port was able to supply so much silver. Boats plying between the desert port and the mystic land remained unknown to most.
It became difficult to get financing to buy more silver. Margin calls came as silver prices started correcting on increased supply. Lenders liquidated silver stock as margin calls were not paid and silver prices came crashing down in a short period of time. They ended their downturn almost at the same level from where the upturn had started. Punt Brothers lost a big fortune in a short period of time. The wise men’s calculation went horribly wrong against the common sense of mystic land’s people.
Meanwhile, mystic land’s love for gold continued even though the boats stopped carrying back silver, so much so that they kept buying more and more gold year after year.
They have more jewellery shops than bank branches. They put more money in gold than with their banks. They have invested more money in gold than in machinery, tools and equipment. Excessive obsession with gold has resulted in high imports resulting into a weak currency. Business is suffering as instead of handing over a factory, parents are handing over bars of gold to their children. Inflation is running high as rising prices, even though through a weak currency, are creating a wealth effect for higher consumption. The rulers of mystic land are worried about high gold holdings and its impact on its economy but are unable to stem the obsession. In the process, the mystic land is becoming a poor country with rich citizens.
Mystic land is now waiting for a reincarnation of Punt Brothers to trade in gold so that they can shift to something else.
Nilesh Shah is director, Axis Direct.
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