Data can always tell you a story. You should know how to get it talking. The number of people searching for the term ‘gold’ is much bigger than words like ‘inves ing’, ‘money’, savings’ or ‘Sensex’, according to Google Trends. The interest in gold is pretty much nationwide. It dominates two-thirds of the search that Indians do practically anywhere. The South Indian states of Andhra Pradesh, Tamil Nadu, Telangana dominate the search on gold.
The recent uptick in the interest for gold shows people are looking to either evaluate the gold they own or keeping track of gold prices to buy or sell more. The rise in interest for the term ‘gold’ coincides with a sharp increase in gold prices over the past six months. In India, we are a nation that is for gold. We love it as jewellery, we love it as gold bars and coins and now also as bonds or exchange-traded funds. Indian households and temple trusts are collectively estimated to own 25,000 tonnes of gold, according to estimates of agencies like the World Gold Council.
At current prices, the value of all this gold is nearly half of India’s GDP of $2.6 trillion. The year so far has created enough situations for you to realise the importance of things related to money and wealth. There is a need for you also to value the gold you own and review the situation. It appears that a quick fix to money problems for many is to borrow against gold. Manappuram Finance is a company that predominantly lends against gold.
The quarterly results in June 2020 give insights on some behavioural aspect of gold. About 70 per cent of the loans given by the non-banking finance company are gold loans. The company’s assets under management grew 26 per cent over last year during the quarter to June 2020. An average gold loan for the company is 51 days, and most of the business is coming from existing borrowers. The average loanto- value of gold loans is 57 per cent.
The company’s holding of gold is significantly more than the money lent. That has happened due to a surge in prices. If you are in financial difficulty due to a loss of income or see uncertainty ahead, as a borrower, you can ask your lender to top up the existing loan. The Reserve Bank of India has increased the permissible loan-to-value for gold loans to 90 per cent. The benefit is available until March 31 2021.
How to play the bond
There are new sovereign gold bonds in the market. The Reserve Bank of India issues these bonds on behalf of the government. The price per unit is the price of 1 gm of gold in the market. There are 42 offerings from the government since 2015. The cost of 1 gm gold has nearly doubled in that time. Gold prices are at their peak. You may not want to be a new buyer in gold right now.
However, if you have gold coins or bars or you have invested in gold for investment purpose, only then it is a good idea to convert the substantial investment into these bonds. You get an additional interest rate over the market price. The world has rarely witnessed a crash in gold prices as it is used as a hedge against inflation. That does not mean it will not happen.
The present rally in gold is driven by investors and not by the demand for consumption. The gold demand from China and India, the world’s biggest gold consumers, has slumped by more than half in the first half of 2020. When people are not interested in gold, they do not buy more. But they continue to hold the gold they own in the form of jewellery.
That is perhaps the reason why gold prices rarely crash. They stagn a t e f o r years. However, this time, the presence of too many investors suggests that it may be different. Investors move their money in and out of asset classes. There is an unease currently in financial assets due to zero interest rates. A lot of money is chasing too few assets. Investors are not happy with prospects for financial assets for now. That does not mean they are not interested in them.
25,000 tonnes
Gold collectively owned by Indian households and temple trusts, according to World Gold Council. At current prices, the value of all this gold is nearly half of India’s GDP of $2.6 trillion.
90%
The permissible loan-to-value for loans against pledge of gold ornaments and jewellery for nonagriculture purposes. This benefit is available until March 31 2021.
(The author is editor-in-chief at www.moneyminute.in)