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:



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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WmMcK's picture

dots not feathers

I always used turbans not tomahawks (tatoo joke)

Thanks for the alternative.

FubarNation's picture

I wouldn't be loaning out my gold.

caimen garou's picture

I just love my tradition, it makes me feel soooo good inside! and by the way, fuck you crome dome bernake!

Market_Magician's picture

Is this why all the Indians I know are loaded? Clearly smarter than the rest of us fools.

Karlus's picture

Mostly because they ususally dont "invest" in status things like cars, clothes, restaurants and expensive vacas. All of that junk adds up.


Diogenes's picture

India's peasants have been investing in gold for thousands of years. Yet India remains India and the peasants remain peasants.

The West used to have a modern economy where gold was a barbarous relic and made more progress in 10 years than India made in 1000.

Not anymore.

I own gold... but I wish I didn't have to... I wish we still had a viable economy.. instead of a third world rat trap kleptocracy.

akak's picture

Funny how people still talk about "Indian peasants" and "Chinese peasants", but never about "European peasants" or "American peasants".

But don't worry --- they will before much longer.

steve from virginia's picture


Just as another ZH article blamed Indian current account woes on gold, the real story is Indian petroleum consumption and direct subsidies for fuel use (waste). India's petro imports are 3 million barrels per day @ + US$110.


Indian petro consmption vastly exceed s domestic extraction. Go here and dial in India and see for yourself:


Biggest problem in this world is the cars not the gold chains (rhetorical or otherwise).



GMadScientist's picture

Wait until you see the Bollywood version of the Beverly Hillbillies.

Titus Flavius Caesar Vespasianus Augustus's picture

Thank Ganesh that here in America, Dems and Republicans have put aside their differences to focus on making America energy independent, and to make sure our foreign policy actually reflects our national security interests.


I'm long these companies that do these 'vaginal rejuvenations' by the way.  By gods, if that doesn't restore our economy, nothing will.


GMadScientist's picture

Have they learned the fine art of rehypothecation yet?

"Indra's Net Worth"

Titus Flavius Caesar Vespasianus Augustus's picture

If a "gold bug" walked across the Lincoln Memorial Reflecting Pool to give Paul Krugman some penny whistles and moonpies, Krugman would write an angry column to the effect that said gold bug couldn't swim.



Titus Flavius Caesar Vespasianus Augustus's picture

Note that for purposes of logicodeductive analysis, Krugman and The Bernank are literally the same entity.


Both are human-shaped objects whom enjoy confiscating wealth from wage earners to give to non-productive cunts.

Bansters-in-my- feces's picture

I see the terrorist managed the price ,oops I mean "moderated" the price of the precious metals for us peasants today again.

Noops,can't have anyone storing any wealth when your not in the club.


Ps....If you do not know about the USA Exchange Stabilization Fund (ESF)

You should learn about who runs it and what it has the ability to do,and does do........

It does the the doo...!!!

Then you see who messes with the Precious metals pries.!

Long-John-Silver's picture

India is populated by a Barbaric people.

Catullus's picture

I see the Glen Beck conspirarcy to get conservatives to buy gold has reached India.

It gets funnier every day.

Bansters-in-my- feces's picture


Wanna buy some paper gold said the banker....

It's so soft and all.

Room 101's picture



Edit: I almost forgot. Fuck You Bernanke.

lasvegaspersona's picture

repo for da pepo

via gold

Titus Flavius Caesar Vespasianus Augustus's picture

You know,  I never see any columns talking about investing in diamonds.


What's going on in the diamond industry - black Africans are getting rich, right?   It's not an industry dominated by a small group of non-African people, one would presume.


Can we invest in these African companies which are no doubt 'cleaning up' based on the value attributed to diamond's by my wife's Upper East Side friends?

auric1234's picture

"excessive  demand for gold"

I fail to understand how can demand for something be "excessive". I guess I would know better if I was a central planner!


Bastiat009's picture

Money is not flowing to the gold market .. Nasdaq is up nearly 3% today .. was up nearly 20% in 2012.

I am not saying I like it. I am not saying it makes sense. I am just saying that the stock market has been outperforming gold for months.

Quinvarius's picture

The reason stocks underperform gold is because they depend on a functioning economy, and the gold price was held down for so long.  That is why stocks continue to lag, and will continue to lag, gold during the fiat meltdown.

Quinvarius's picture

It is so funy how badly they want people in India to buy stocks.

Bastiat009's picture

Why wouldn't you buy stocks? All the governments and central banks in the world make sure that stock prices only go up.

Quinvarius's picture

I didn't say stocks were worse than paper money.  But in a depression, starting from such a low point in gold, gold represents better value.  When people say teh gold standard commands gold over 50k an ounce, it isn't a joke.  That is where the math leads.

Bastiat009's picture

The problem is that the depression keeps being postponed. I am not saying it won't happen but I've been reading everyday for years that the depression is for tomorrow and it's getting old ... but definitely not true.

Quinvarius's picture

No.  We are in a depression now.

Listen I was the only one on here getting junked like crazy saying buy stocks for the last two months.  I coined the term "Kaminskied" for people who took his advice and got raped.  But I know it is only the money printing.  You are in dangerous territory of you think what is going on is based on economic activity.  Do not delude yourself.

supermaxedout's picture

Basel III the game changer for gold; Now its official Gold is the best money again.

You can read there:

"The number of member jurisdictions that have published the final set of Basel III regulations effective from the start date of January 1, 2013 is 11. These includes  Australia, Canada, China, Hong Kong SAR, India, Japan, Mexico, Saudi Arabia, Singapore, South Africa and Switzerland," the committee said.

"Seven other jurisdictions — Argentina, Brazil, the European Union, Indonesia, Korea, Russia and the US — have issued draft regulations, and have indicated they are working towards issuing final versions as quickly as possible. Turkey will issue draft regulations early in 2013," it said.

Some major banks in Europe and the US have however said they would not be able to meet next month’s deadline (1.1.2013) for capital reforms but the Basel Committee has insisted this would not derail their implementation.

Stefan Ingves, chairman of the Basel Committee said last week: "While some jurisdictions have not been able to meet the planned start date, a large number will be ready to begin introducing the new capital requirements as planned on January 1 2013."


And this means already now gold is not anymore a commodity but M O N E Y. The Basel III rules (published by the BIS Bank of Intl. Settlement in Basel Switzerland)  which is setting the worldwide standard for the banking community have moved gold up in the value ladder by.1.1.2013. It does not matter that it is till now only effective in the first group of the jurisdictions.  The effect that gold is regarded in Australia, Canada, China, Hong Kong SAR, India, Japan, Mexico, Saudi Arabia, Singapore, South Africa and Switzerland as hard stable cash, which is the highest quality of capital, equal with US Dollars, Treasuries, German Bunds etc.  is breaking the damm.  Gold can now be purchased at will by the banks in these jurisdictions in order to diversify their capital holdings without the till 31.12.2012 obligatory 50% value discount to the market price.  The banks in these jurisdictions can now accumulate gold without their capital base being harmed.  The earlier they do it, the more their capital base can benefit from this move..

And these expected gains are absolute necessary to hold the balance sheets of the banks together, because at the same time the new Basel III rules say, that (dont laugh) Asset Backed Securities which were also regarded as first class capital (Tier I)  till 31.12.2012 have lost their status and can not anymore be regarded as capital at all.

Imagine at the same time Japanese Souvereign bonds would loose two notches  from AAA to AA- meaning the value of these bonds (under the present BIS capital rules) would automatically be reduced by 20% in the banks balance sheet. Its not unrealistic that this is going to happen within the next 12 months.  So the banks in Japan and all over the world need a lot of "gold windfall profit" to cover their ass from these losses. And  there is no other "safe haven asset" anymore which is having the potential to move upward. Dollars and treasuries are at best moving sidewards if not downwards.

So whats left.  not much. It seems to me that the time of the gold mania is "ante portas". Insofar I can understand the IndFinMin. If nothing happens then the new gold rush can destroy the  old fiat world within a matter of days.   But you know what, nothing can stop this thing in my opinion. Be it now or in the next 12 to 24 months. The financial world has to find a new equilibrium to function. Now everything is stuck and out of balance and in my opinion the things are going its way they have to go.

awakening's picture

Australia has no gold

'After a campaign throughout 2012 to seek clarity in regards to the location of Australia’s Gold Reserves the Reserve Bank of Australia (RBA) has confirmed today in an email to me that 99.9% of their Gold Reserves are held in the gold vault of the Bank of England.'

Better get the RBA Governor on the phone to the BoE to reclaim possession of the royal (as a dig at HM's recent visit to said vaults) asset ASAP.

Dr Benway's picture

Thanks for posting this. One of the greatest gold producing countries in the world has no ability to store its own gold "securely and cost-effectively"? LOL.

And it only took most of a year for RBA to divulge this to the people they ostensible answer to? Makes me feel so 'confident'.

Fuck you Glenn Stevens!

awakening's picture

Thanks for posting this.

I'm actually disappointed ZH didn't pick up on it (shout out to this forum though: ), 80 tons of the barbaric element isn't something to sneeze about =S

whoknoz's picture

gold "loans" in India, and many other countries with poor "bank" options but a looong tradition of keeping your wealth on your arm, are much more "transactions with gold as money" than what Westerners think of as "pawn" when you give up a certain valuable for cash, and then redeem that exact valuable...or a "loan" where a certain assest is pledged for collateral...rather, the tiny quantities of gold are exchanged for paper and coin at pretty good rates (because there are many gold dealers in the local markets, and everyone knows the spot price) and later, when excess funds are available, small quatites of gold are purchased for "saving" from what ever dealer in what ever market is deemed best....

...and classifying these pm assets as "jewelry" (purposfully) misses the point... for while these small amounts of pm are dcorative, they are kept on the body much more for security and for establishing status in cultures of minisucle variances...

this indiginous intercourse is way beyond "tradition" is the genius of the poor and ignorant...e.g. they long ago figured out that TPTB have no plan but to scew everyone, so the bottom 1% developed what is actually a real money market beyond the reaches of the idiots in control...

In our current frame of reference it hasn't mattered too was a "service" TPTB allowed to continue in lieu of their own inabilities to make a life for anyone but themselves, but now, with the big lie of everyone's coin-of-the-realm becoming evident, it looks like these pitiful pockets of poverty are actually the one place where real money is matching up with real value:

you want money?...give me gold

you want gold?...give me money

...and the magic number ("exchange rate") that makes these millions of monthyly transactions happen is less and less dependant on the fat asses sitting around a mahogany desk in London...

one day (and soon we hope) those still awake in the enlighted West will recognize that We The People can take charge of our money system by using our collective power to decide what is valuable and what medium of exchange we will trust.

We'll all enjoy our 'daily gold fix" but London (or any other city of elitist fools) need not have a thing to do with our lives, our fortunes, and our sacred honor...




ejmoosa's picture

<<<  The Fed holds Gold and is a hypocrite.

<<<  The Fed sold all the gold and they are thieves.

Cthonic's picture

<<< The Fed leased out a significant portion of the gold through its agent, JPM

<<< The Fed never held any good delivery gold to begin with

ebworthen's picture

Ben, Ben, Ben..."Gold is not money, it is a tradition"?

Economics is not science, it is mental alchemy that turns lead thoughts into clay feet. know that...which is why you bash gold.

israhole's picture

Turns out gold is money after all.

Mr. Hudson's picture

: "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."

We have the same thing here. They are called "Pawn Shops".

zorba THE GREEK's picture

Gold has always been the best money.

Clowns on Acid's picture

Lending against gold is an older traditon than the Fed's 1973 tradition.

Has bernake ever eaten chicken marsala? He wil be eating crow.