Don't Show Bernanke This Chart Of Gold Loans In India

Tyler Durden's picture




 

One of the Fed Chairman's most memorable lines in recent history is that "gold is not money... it is tradition." Perhaps he was merely listening to the Fed's computers, Ferbus, Edo and Sigma, which we now know form the backbone of US central planning and whose DSGE model output is usually spot on until it happens to be catastrophically wrong, on the issue. Or perhaps that is merely what one is taught (and teaches) in the Princeton economics department. Whatever the reason for Bernanke's belief, don't show him this chart from a just released "Report of the Working Group to Study the Issues Related to Gold Imports and Gold Loans by NBFCs" in India, part of a coordinated campaign to minimize Indian gold demand and imports whose direct substitution to "(un)sound money" in the country is one of the reason being attributed for the nation's high current account deficit (as reported earlier) and why the finance minister said "demand for gold must be moderated." The chart shows the staggering eightfold increase in India's gold loans "which monetize the idle gold in the country", in just four short years. In short it proves that in India, gold is the only real money, and is the only fallback option in a country where inflation is still rampant, and where even simple peasants prefer to keep their wealth not in the local paper currency, which has been losing its value aggressively in recent years, but in the shiny metal. Must be "tradition."

Here are some of the salient points from the report on the relentless surge of gold's popularity in India where it is now effectively, a parallel currency, and is accepted as money good (and in many cases, better) collateral for those who need short-term liquidity and funding:

Possession of gold has been a symbol of prosperity in India and is considered a safest form of investment that provides hedge against inflation. Gold has always been a highly coveted product not only in the form of jewellery, gold bars or bullion, but also has the ready acceptability as collateral for the lenders because of its high liquidity character. According to an estimate of World Gold Council, about 10 per cent of world’s gold is in India’s possession. Accumulated Gold stock in India is around 18,000 to 19,000 tonnes as per independent estimates. During 2002-2012, annual gold demand has remained relatively stable at around between 700 to 900 tonnes despite the rise in prices from Rs. 13,333 to Rs. 86,958 per troy ounce (as on May 25, 2012). In India, the demand for gold has not been adversely impacted by rising prices.

 

Genesis of Gold Loan Market in India

 

In India, it is believed that most of the gold is held by people in rural areas and in many cases this is the only asset they have in their possession though in small quantity. All the while, rural Indians know that if his crop fails or his family is sick, he can raise cash in a moment from the goldsmith or may be pawnbrokers and moneylenders, because the rural India lags in availing banking facilities. Therefore, even the pattern of saving in India differs for various income groups. While richer sections diversify their portfolio according to risk-return equation, the poor rely more on commodities like gold as well as silver. The jewellery bought in times of prosperity has been pawned or sold for cash in periods of distress or need. Over the years, some portion of this is being used as collateral for borrowing in the informal market, though estimates is not available. It is a common practice in India that gold is pawned, bought back and re-pawned to manage day-to-day needs of the poor and middle class. The pledging of gold ornaments and other gold assets to local pawnbrokers and money lenders to avail loans has been prevalent in the Indian society over ages. Due to the increased holding of gold as an asset among large section of people as also the borrowing practices against gold in the informal sector have encouraged some loan companies to provide loans against the collateral of used gold jewelleries for years and over a period to emerge as ‘specialised gold loan companies’.

 

Some independent estimates indicate that rural India accounts for about 65 per cent of total gold stock in the country. At times of emergency, gold ensures a loan almost instantaneously for the poor and without any documentation process. Most of the loans are for meeting unforeseen contingencies and may be categorized as personal. Further, growth in middle income classes and increase in the earning capacity of women, a core customer group for gold is expected to further boost the demand of gold. The demand for gold has a regional bias with southern Indian states accounting for around 40 per cent of the annual demand, followed by the west (25 per cent), north (20-25 per cent) and east (10-15 per cent). Accordingly, even the gold loan market has also developed on the same lines where a large portion of market is concentrated in southern India. India continues to be one of the largest gold markets in the world. The attraction towards gold in India stems from varied historical and cultural factors and its perceived safety in times of economic stress.

 

Since 1990, with the repeal of Gold Control Act, Indians have been allowed to hold gold bars. In the year 1993, the provisions of Foreign Exchange Regulation Act (FERA) relating to gold were repealed and imports were allowed by NRIs and since 1997 gold imports were brought under Open General License. All these gave fillip for the development of not only the gold market but also the gold loans market. With a view to bring the gold holdings to the core financial market, several gold based financial products have been made available to retail consumers in the Indian market from time to time. Recently, Exchange Traded Gold Funds (ETF) has also been allowed in the Indian markets, which have received a positive response from investors.

 

Structure of the Players in Gold Loan Market

 

Borrowing against gold is one of the popular instruments based on physical pledge of gold and it has been working well with Indian rural household’s mindset, which typically views gold as an important saving instrument that is liquid and can be converted into cash instantly to meet any urgent needs. The market is very well established in the Southern states of India, which accounts for the highest accumulated gold stock. Further, traditionally gold holders in Southern India are more open to accept and exercise the option of pledging gold as compared to other regions in the country which are reluctant to pledge jewellery or ornaments for borrowing money.

All of the above is purely on the regulated side of things. It is in the gold "black market" in India where things get really exciting:

In addition to a growing organised gold loans market, there is a large long-operated, un-organised gold loans market which is believed to be several times the size of organised gold loans market. There are no official estimates available on the size of this market, which is marked with the presence of numerous pawnbrokers, moneylenders and land lords operating at a local level. These players are quite active in rural areas of India and provide loans against jewellery to families in need at interest rates in excess of 30 percent. These operators have a strong understanding of the local customer base and offer an advantage of immediate liquidity to customers in need, with extreme flexible hours of accessibility, without requirements of any elaborate formalities and documentation. However, these players are completely unregulated leaving the customers vulnerable to exploitation at the hands of these moneylenders and pawn-brokers.

So in other words, in India gold is the most fungible asset, and the most rapidly converted into other forms of liquidity, to the point where it is not only the currency but also the true store of value. Sure enough:

Gold as an asset is liquid and can be readily exchanged for cash even in the informal market. With the gold market getting more organized within a formal setup, in recent years there has been rapid growth in the gold loans market particularly in gold loans disbursed by Banks and NBFCs (Table 6.1). Both demand and supply side factors have played important roles in bringing about this  growth. From the demand side, holders of gold were able to get cash in lieu of their gold in a formal setup and at higher loan to value ratios at relatively less rate of interest with better terms when compared with the informal segment. From the supply side, banks and NBFCs were able to disburse loans against collateral whose value was stable even in times of financial turmoil.

There's more:

As gold loans are issued solely on the basis of gold jewellery as collateral, the high growth rates observed for gold loans in recent years could be reflecting the emergence of a liquidity motive apart from the conventional saving motive to acquire gold. The strengthening of liquidity motive over time could result in increased demand for gold loans. The rapid growth in gold loans in recent years indicates unleashing the latent demand for liquidity from significant proportion of the population who faced severe borrowing constraints in the past. This could also be viewed as an offshoot of the huge rise in gold price along with liberal loan to value ratios that existed till the recent past. The prospects of gold value appreciation together with easy and flexible availability of gold loans increase the demand for gold and thereby to gold imports.

 

It is known that the gold demand in India is influenced strongly by the feature of gold as an attractive investment option. The recent gold loan growth phase coincided with the rise in growth of imports of gold, which grew, despite the rise in gold prices. A quiet swing in savings from financial products to assets, showing propensity for further growth, is visible in the Indian economy. There were apprehensions that liberal loan to value ratio and consistent rise in gold prices could result in an incentive for individuals, to consider investment in gold jewellery as an arbitrage opportunity, by pledging the purchased jewellery and use the proceeds to buy gold jewellery to take advantage of future appreciation. Thus, gold loans and demand for gold (jewellery) can theoretically become mutually reinforcing in the long term.

But don't worry, it is not money. It is only "tradition."

Needless to say, the overarching theme of this report, whose purpose is to isolate the attractiveness of gold to the general population, and most importantly, prevent it, is that gold demand must be limited as the only control a collapsing central-bank based statist system has is in controlling "money" that is infinitely dilutable and can inflate away debt, not the type that actually has value, and that a central bank can't create out of thin binary air. Hence the report's conclusion:

Summing-up:

 

There is a need to moderate the demand for gold imports, as ensuring external sector’s stability is critical. But, it is necessary to recognise that demand for gold is not strictly amenable to policy changes and also is price inelastic due to varied reasons. What is critical is to ensure provision of real returns to investors through various financial savings products. What is also relevant is the need for banks to introduce new gold-backed financial products that may reduce or postpone the demand for gold imports. The Working Group believes that providing real rate of return to investors through alternative instruments holds the key to reducing the excessive  demand for gold. Meanwhile, there is also a need to increase monetisation of idle gold stocks in the economy for productive purposes. As of now, there appears to be no close substitute to wean away investors’ attention from gold. Investors’ awareness and education is important, in this context, to channel the investment to gold-backed financial products. Banks and NBFCs may continue to deliver gold jewellery loans, which monetises the idle gold in the country. The gold loan market has grown well in recent years. It is time for consolidation of the operations of the gold loan NBFCs. The gold loans NBFCs need to transform themselves into institutions free of complaints, have proper documentation and auction procedures, with rationalised interest rate structure and have a branch network that is fully safe and secure. Gold loans NBFCs’ linkage with formal financial institutions may be reduced gradually. Such transformation ensures the gold loans NBFCs’ future growth more robust, besides making them a contributing segment to the financial inclusion process.

One can almost feel the panic.

And yet the real message here is between the lines: just like the US government's veiled threat to curb gun sales, and/or to adjust the second amendment altogether resulted in precisely the opposite reaction to that intended, i.e., a record surge in purchases of all gun related products, so India's ever more aggressive attempts to curb gold as a monetary equivalent will simply force the population to hoard ever more gold, result in even greater gold imports, both using legal and less than legal means, but most importantly, lead to a surge in the gold black market as the government's more explicit intervention in the definition of what is and isn't money forces more and more Indians to seek the safety of the yellow metal in ever greater numbers.

What this means for the supply and demand dynamics of not paper, but real physical gold, we leave to our readers to decipher. Failing that, they can always just sunmit an inquiry into the Princeton economics department.

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Wed, 01/02/2013 - 15:37 | 3115733 GMadScientist
GMadScientist's picture

Clearly India chose the wrong target for their gold taxing regime.

Wed, 01/02/2013 - 15:39 | 3115746 redpill
redpill's picture

Collatoral with intrinsic value, what a concept!

Wed, 01/02/2013 - 15:42 | 3115765 walküre
walküre's picture

I guess USD aren't worth shit anymore. Not even Indians will leverage with USD collateral.

Wed, 01/02/2013 - 15:46 | 3115780 ParkAveFlasher
ParkAveFlasher's picture

India as a nation of self-empowered individuals cracked an Empire's back by weaving its own garments, drying its own salt, and drinking its own tea. 

Now it chooses to bank its own wealth. 

God Bless The Indian People.

Wed, 01/02/2013 - 16:02 | 3115853 sunaJ
sunaJ's picture

I wonder if a billion Indians buying gold is in The Bernank's computer models.  My guess is no. 

Wed, 01/02/2013 - 16:12 | 3115914 Snakeeyes
Snakeeyes's picture

Gold really started to increase during Clinton's presidency.  And never stopped.

http://confoundedinterest.wordpress.com/2013/01/02/the-day-after-republi...

Thu, 01/03/2013 - 01:35 | 3116074 SafelyGraze
SafelyGraze's picture

answer: Gold Loans In India

question: what has 70 percent annual growh rate? (spoiler: it's a link to wolfram alpha plot of exponential with base 1.7) 

http://oi45.tinypic.com/106edjb.jpg (graph of same, superimposed on chart in the above article)

 

Wed, 01/02/2013 - 15:49 | 3115786 DoChenRollingBearing
DoChenRollingBearing's picture

There is a difference between Indians (poor ones) holding gold and those who have gold who are not poor.  I have strong hands, I suspect many here at ZH do as well.

 

Just wait until those with gold decline to sell...  Probably about the time that buying physical gold gets more popular (at least here in the USA).  That's when the big price spike comes...

Wed, 01/02/2013 - 15:53 | 3115811 Solon the Destroyer
Solon the Destroyer's picture

Speaking of Gold, Goild Standards and the Backwardation you describe...

Hugo Salinas Price has accused Keith Weiner, whose recent series on Gold Standards was published here at Zero Hedge, of heavily plagiarizing the work of Professor Fekete:

http://www.plata.com.mx/mplata/articulos/articlesFilt.asp?fiidarticulo=201

Zero Hedge and the Tylers are mentioned in the post by Price. I have already posted this comment and link on Acting Man, the original source of the articles.

Wed, 01/02/2013 - 16:01 | 3115852 Dr Benway
Dr Benway's picture

Your link provides precious little proof of plagiarism. Weiner has 'parroted thoughts' from his former professor?

Wed, 01/02/2013 - 16:47 | 3116060 Solon the Destroyer
Solon the Destroyer's picture

I'm sorry, you have another word for the unreferenced copying of another person's concepts?

Perhaps you should be addressing the source of the accusations, Hugo Salinas Price?

As support for his accusations, I can say that I have read everything Fekete has published and also the series by Weiner, and the lack of reference is astounding. In other places, Weiner does state the debt he owes to Fekete, yet when it comes to articles clearly founded on the work of another, references are missing.

Why?

If you doubt the validity of Price's accusations, perhaps do some reading yourself.  I personally doubt there is much motivation for a billionaire to risk libel charges on something completely unfounded.

Thu, 01/03/2013 - 06:03 | 3117891 Dr Benway
Dr Benway's picture

Merely stating something is plagiarized, without backing it up in any way, does not constitute 'proof'.

Also, if 'parroting ideas' was all that was necessary for plagiarization to have taken place, every fucking commenter here would be a plagiarizer.

Wed, 01/02/2013 - 15:58 | 3115838 RockyRacoon
RockyRacoon's picture

Buying physical gold getting more popular?  That will happen, but it won't be soon, no matter how many gold dispensing machines appear in Dubai airports and hotels.

Here's some eye candy for those who insist that gold is in a bubble:

http://www.caseyresearch.com/gsd/sites/default/files/Historical%20Bull%2...

Wed, 01/02/2013 - 17:47 | 3116345 AgAu_man
AgAu_man's picture

Pretty good, you Wagner opera-type, you!

People would do well to research not only which countries do and do not hold US debt, but also which did and did not buy into the CDS (credit default swaps) Ponzi scheme. Do the work, you may be enlightened.

Wed, 01/02/2013 - 15:45 | 3115778 whatsinaname
whatsinaname's picture

On the other hand it scares me that Indians are using gold loans - most loan schemes are stacked against the borrower. Folks are going to losing money to the lenders or some lenders are going to go bust !!

Wed, 01/02/2013 - 15:52 | 3115806 Dr Benway
Dr Benway's picture

Yeah, the +30% interest rates don't sound too great. I would also be interested in how the longer term gold loans work if the price of gold changes in the meantime.

Wed, 01/02/2013 - 20:44 | 3117027 Room 101
Room 101's picture

Compared to what our payday loan moneychangers charge? 30% is a steal.

Thu, 01/03/2013 - 03:06 | 3117894 Dr Benway
Dr Benway's picture

With gold collateral? I'm not sure what a pawnshop charges with gold collateral but that would be the closest equivalent.

Wed, 01/02/2013 - 15:38 | 3115737 SnoopLion
SnoopLion's picture

So basically, most Indians will be losing half their wealth over the next 5 yrs as GC goes to 800? yay

Wed, 01/02/2013 - 15:42 | 3115757 walküre
walküre's picture

Right. Dreamer.

Wed, 01/02/2013 - 15:46 | 3115785 yogibear
yogibear's picture

In the mean time you have Bernanke and the Federal Reserve printing. Wait until that pent-up inflation is released. The Fed has been stuffing it's banks with US debt from printed dollars. What a sham.

Wed, 01/02/2013 - 15:49 | 3115798 Temporis
Temporis's picture

Idiot.

Wed, 01/02/2013 - 15:54 | 3115821 GMadScientist
GMadScientist's picture

Too much juice and gin...

Wed, 01/02/2013 - 16:01 | 3115847 SnoopLion
SnoopLion's picture

Gold is the fear trade, not the inflation trade. We are in the middle of the "fear" bubble. That shit is popping soon my children. Jah No Partial. One love. 

Wed, 01/02/2013 - 16:15 | 3115926 ParkAveFlasher
ParkAveFlasher's picture

Yo Snoop, hit that bong again cuz its on the Bernanke. 

Wed, 01/02/2013 - 17:13 | 3116180 exartizo
exartizo's picture

You are mistaken.

The fear trade IS the inflation trade, and vice versa,

Wed, 01/02/2013 - 17:29 | 3116256 Panafrican Funk...
Panafrican Funktron Robot's picture

In case anyone was wondering, the color gold is sacred to Rastafarians, as it signifies the wealth of Ethiopia.  Ironically, Ethiopia's central bank has zero gold holdings, in spite of the extensive mineable gold (and other precious metals/minerals) in the country.   

Wed, 01/02/2013 - 17:49 | 3116351 ParkAveFlasher
ParkAveFlasher's picture

You might say that Ethiopia's gold reserves went "up in smoke".

Wed, 01/02/2013 - 18:42 | 3116591 GubbermintWorker
GubbermintWorker's picture

All I know is that I don't want none of that MBS bullshit trade goin on at 45billion a month!

Wed, 01/02/2013 - 15:38 | 3115740 Dr. Richard Head
Dr. Richard Head's picture

I miss the "Can't eat it" crowd of paper bugs.

Wed, 01/02/2013 - 15:47 | 3115787 CH1
CH1's picture

Nah... it never happened.

And if it did, it was misreported.

And if it wasn't, you're blowing it out of proportion.

And if not.... you're a terrorist!

Wed, 01/02/2013 - 15:38 | 3115743 devo
devo's picture

Fuck you, Bernake.

Wed, 01/02/2013 - 15:46 | 3115783 Osmium
Osmium's picture

That just never gets old.  :)

Wed, 01/02/2013 - 15:50 | 3115799 pods
pods's picture

And if it ever does, you can substitute "Hey Ben, DIAF!"

pods

Wed, 01/02/2013 - 15:52 | 3115805 Cognitive Dissonance
Cognitive Dissonance's picture

It certainly has become a "Good as Gold" ZH tradition.

Wed, 01/02/2013 - 15:39 | 3115744 Dealer
Dealer's picture

tradition, bitchez

Wed, 01/02/2013 - 15:41 | 3115760 Titus Flavius C...
Titus Flavius Caesar Vespasianus Augustus's picture

So, I suppose, the CIA will start to 'destabilize' India pretty soon?

 

Are they buying silver and copper too?

 

Apropos of little, and in news that will shock many of you - Krugman thinks signs of improvement in Latvia prove that he's right, because he's wrong.

 

http://krugman.blogs.nytimes.com/2013/01/02/latvia-once-again/

 

 

Good grief. 

 

damnant quod non intellegunt

Wed, 01/02/2013 - 15:53 | 3115815 King_of_simpletons
King_of_simpletons's picture

There are many factors that are already destabilizing to India. CIA will need to get on the waiting list.

Wed, 01/02/2013 - 15:57 | 3115819 Cognitive Dissonance
Cognitive Dissonance's picture

Krugman got his PhD as the prize in a late 70's inflation ravaged Cracker Jacks box.

<If only I could have been so lucky. All I got was that stupid CIA decoder ring and a paste on mustache.>

Wed, 01/02/2013 - 15:55 | 3115822 King_of_simpletons
King_of_simpletons's picture

.

Wed, 01/02/2013 - 15:55 | 3115823 King_of_simpletons
King_of_simpletons's picture

.

Wed, 01/02/2013 - 15:57 | 3115831 h0oS
h0oS's picture

The CIA will be spending 2013 destablising the US. India is pretty low on their list right now.

Wed, 01/02/2013 - 15:44 | 3115767 ReptilianSlaveMaster
ReptilianSlaveMaster's picture

I don't get why everyone is pissed off with Bernanke and Obama - How is free money and free drugs a bad thing again?? Hell we got it good now that the government will fund my lifestyle that consist mostly of playing xbox and doing legal drugs like weed and valium, debt has never felt so good, Krugman was right after all!

Wed, 01/02/2013 - 15:44 | 3115771 PAWNMAN
PAWNMAN's picture

Been working in the pawn business for a long time.

Wed, 01/02/2013 - 20:49 | 3117039 Room 101
Room 101's picture

Cool. So dish...whats' going on of late that you'd like to pass along to us bitchez?

Actionable information is always appreciated.

Oh, and while I'm commenting: Fuck You Bernanke. 

Wed, 01/02/2013 - 15:46 | 3115779 unplugged
unplugged's picture

U.S. will be last to the golden party.

Wed, 01/02/2013 - 15:48 | 3115788 Dr Benway
Dr Benway's picture

The US will get a golden shower and a lemon party

Wed, 01/02/2013 - 15:48 | 3115789 Dr. Richard Head
Dr. Richard Head's picture

Bernanke and Congress has been giving us the golden shower for years now.

Wed, 01/02/2013 - 16:03 | 3115868 Mad Mohel
Mad Mohel's picture

Never, never underestimate the power of the Schwartz. Don't think they aren't taking a turd in the punch bowl to ruin the party for everyone.

Wed, 01/02/2013 - 15:48 | 3115791 pods
pods's picture

Still looks like an exponential function to me, except the Indians (dots not feathers) are going to lose actual gold in a default, instead of a *sob* ruined credit rating.

Anyone else see this as dumb?  Basically one side of the aisle (borrower) is shouldering all the risk, as Indian "loans" are fractionally reserved, are they not?

pods

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