Are Demonetised Notes Striking Gold

1. Investigation agencies have been tasked with identifying jewellers indulging in illicit conversion of demonetised money.
2. A notice has already been served to 400 such jewellers across 25 cities.
3. The Income Tax Department will be keeping track of gold transactions.
4. The IT department will seek explanations from jewellers if a trend of deliberate splitting of sales is found.
5. Unscrupulous foreign exchange operators have been halted following an Enforcement Directorate crackdown.
6. Tax on undisclosed income has been set at 30% with an additional 33% surcharge plus 10% penalty.

As clearly seen, stricter PAN card regulations enforced from 1st January 2016 have not deterred people from buying large values of gold in cash. The move to curb black money came as a shock to the nation on 8th November 2016. Though measures have been taken, people still resort to loopholes and roundabout methods to convert their ill-gotten gains. There are various ways of converting black money without being caught by the IT department, but there is always a risk. To avoid harsh punishment, jail terms and fines, the government has given the option to declare undisclosed income and pay the set amount of tax.

Demonetisation vs. Gold Inflation Hedge

Demonetisation and gold as an inflation hedge are two very different economic topics, but they intersect meaningfully when analyzing how people protect their money during financial disruptions.

Demonetisation in India, announced in November 2016, involved the sudden ban of ₹500 and ₹1,000 notes, which accounted for nearly 86% of the currency in circulation. This created an immediate cash crunch and forced people to seek safer, more stable ways to preserve their wealth. One of the most preferred alternatives was gold.

Gold is considered a traditional hedge against inflation and currency devaluation. When paper money loses value or purchasing power due to inflation or government actions (like demonetisation), people tend to invest in gold because:

1. It retains intrinsic value.
2. It is globally accepted and tradable.
3. It is seen as a "safe haven" asset.

During the demonetisation period:

1. Many investors rushed to buy gold, causing a temporary spike in gold prices.
2. Gold acted as a financial shelter, especially for those holding unaccounted cash.
3. Demand for physical gold rose sharply due to fear of cash devaluation.

On the other hand, inflation hedging with gold is a long-term strategy. Historically, when inflation rises, the value of currency drops, but gold prices often increase, maintaining the investor’s real wealth. However, during demonetisation, the motivation to buy gold was not just inflation protection, but also urgency to convert untraceable cash into assets.

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