16 July 2014

Indian monsoon & 12.5% interest gold loans

I have a short post up on the corporate blog on the current state of the Indian monsoon, which matters because poor agrarian Indian farmers are purported to buy over 60% of Indian gold. If monsoon rains are good they buy gold, if not they sell some to buy next year’s crop.

While writing this article came up which is mildly negative for Indian gold demand (as it is only talking 80 tonnes) as it seems the jewellery industry is going to be further crimped by a new rule limiting their gold deposit schemes (ie people lend gold to jewellers to fund their business) to 25% of their assets. The really interesting thing is that the new law also prevents the jewellers from paying more than 12.5 per cent annual returns on those gold loans! Talk about using gold as money. I suppose they have to pay those rates due to the risk of them running off with the gold or going bankrupt.

Just wait to Wall Street finds out about these yields - beats current junk bond rates. With investors desperate for yields in ZIRP environment will we see Wall Street selling Indian Jeweller bonds at 10% (yep 10%, where do you think those bankers bonus come from)?

5 comments:

morgan smith said...

Loans on gold are a win-win situation for both customers as well as banks and finance companies as the rate of default is almost zero. In most cases, people take loans on gold to meet immediate requirements - for instance, hospital charges or weddings.

Koos Jansen said...

Are these indian gold loans denominated and settled (principal and interest) in gold, US dollar or Indian rupees?

Bron Suchecki said...

Don't know, usually Indian loans are more about people using gold as collateral against cash loans, this is more a case of actually lending gold to someone for them to use.

Koos Jansen said...

Yes, lending gold to a jeweler for production is a type of gold loan of which the principal is in physical gold for a fact. Now we need to know if the interest is settled in physical gold as well. I'll ask my source in India.

I also asked him about the rainfall, he replied:

Based on my conversation with a couple of people... Rainfall has been good so far, although a bit delayed. This is not expected to negatively affect agricultural production. So, I don't think this should be the reason for worry about the gold market in India.

However, not much gold is being traded in India right now. This is for two reasons in my view... The wedding season is over, so this demand is gone. Add to that the fact that by this time, farmers have run out of cash, having just sown their fields.

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