India is one of the largest consumers of gold. The surge in jewellery demand is usually seen during wedding and festive seasons, leading to increase in the gold prices and gold loan requirement. The need of funds during special events makes people either liquidate the gold asset or take a loan against the same. The gold loan interest rates in SBI, ICICI, HDFC, Muthoot, Manappuram and other financial institutions are correlated to the inflation and gold prices. If an individual wishes to either invest in gold or borrow funds against the same, he/she needs to understand the equation between inflation and gold rates.
A gold loan is quickest to get. Banks and NBFCs can provide funds against gold coins and ornaments, within a few hours from loan approval and asset valuation. One can borrow anywhere between Rs. 10,000 and Rs. 1 crore. The documentation procedure is simple. The applicant just has to submit identity and address proof with signed and filed application form, and recent passport-sized photographs. The funds are disbursed straight to the borrower’s bank account, while the gold pledged stays secured in safe vault of the lender.
Understanding Gold Loans, Rates, and Inflation Effect
Gold demand is driven by income. When income level is high, the demand for gold rises. Similarly, when income level reduces, or people lack funds, they look towards secured assets such as gold as cash back-up. With State Bank of India and other public and private banks/NBFCs offering gold loans, individuals rather take loans against the asset and keep the ornaments intact.
Majorly utilized for raising funds for emergency financial situations, gold loan rates depend on the safety margin for the lender, while unsecured loans come with fixed rate of interest. Pledging more ornaments for same loan amount that one would get from collateral-less loans, thus, attracts a lower interest rate. Gold provides stable returns and have high mortgage value.
When the interest rates are high, the same for loans against gold are lower than other types of loans. A lot many people today prefer jewel loan than unsecured loans to fund personal and business expenses, such as education, home repair, travel, wedding, car purchase, medical treatment etc. It is because, even during inflation, the rate of gold is lower than credit card and personal loans.
Below given is information about inflation, gold prices and rates, and how these are interrelated to push or lower the demand for loan against gold and gold investment.
- Secured Returns
People always invest or purchase gold to safeguard themselves from financial uncertainty and volatility. This is why; physical assets such as gold jewellery and coin are viewed as safe asset, as these do not lose value. Most investors take gold even if the domestic economy is in recession or growth phase, as one can sell the gold or maximize profits when the gold rate and price increases.
Borrowing against gold also gives a respite in interest rate, as that against gold are lower than other loans. Do remember, that change in rupee-dollar rates have no impact on rates of gold denominated in dollars.
- Rupee and Dollar
The rupee-dollar equations play a major role in deciding the Indian gold rates. It however, does not have an effect on global gold prices. This asset is imported, thus, when rupee weakens against dollar, the prices of gold will appreciate in terms of rupee. When inflation rises, the currency value goes down. People then hold money in form of gold.
Thus, during times when inflation remains high for a long period, gold hedges inflationary conditions, making the price of gold high. This is why, in inflation, the gold loan value increases. Taking a loan when gold prices are down would mean, less amount of funds, and vice-versa.
- Fixed Income Assets
Under normal circumstances, gold and interest rates share a negative relationship. The rising yield makes one expect a strong economy, which gives rise to inflation. When rates rise, individuals invest in fixed-income assets that bring fixed return. However, gold does not guarantee a fixed return, and thus, demand for it takes a back seat and prices remain flat. International gold price is dominated by dollar. Thus, if value of dollar goes down, the gold prices increase, and vice-versa.
- Fall in Dollar Value
Falling dollar would push up the value of Indian currency, increasing the demand for commodities like gold. It will also give a boost to gold rates. Hence, when US dollar loses value, investors invest in alternate sources to store value, and this is how gold become an alternative for such investors. Experts opine that gold is an effective investment portfolio diversifier given its low to negative relation with other asset classes.
The demand of gold in India also depends on the demand generating from the rural sector, especially in the monsoons. The country consumes about 800 to 850 tonnes of gold in rural area, and accounts for 60 percent of India’s gold consumption. During monsoon, thus one can find farmers buying gold from their earnings. On the other hand, if the crop production is deficient, farmers usually sell the gold to generate funds.
Gold can protect one’s investment from volatility because micro and macro economic factors that come associated with returns, as most asset classes do not directly influence the gold prices. The jewel loan value and rate are also dependent on these factors. Inflationary pressures in global economy are definitely drivers to gold prices and rates.