May 28, 2013
India’s official problems with seemingly endless gold demand are well known: with popular demand for gold soaring, and especially so in the past month following the forced price smash of spot paper gold prices, it has gotten so bad that India’s April trade deficit soared to $17.8 billion as a result of a 138% YoY increase in business gold imports.
Further compounding the desperation of the government to enact firm controls on the free dissemination of gold in a country which according to WGC estimates has 10% of all world gold in its possession (18,000-19,000 of accumulated gold stock) is that in India loans against gold are not only surging, but continue to be one of the primary means for citizens to monetize the gold in their possession, and to get paper currency from banks all too willing to lend out cash against gold.
Which is why in early May, several weeks before the government directly addressed the people pleading for the Indian population to “contain its passion for gold”, the Reserve Bank of India issued a directive prohibiting the granting of advances (i.e., loans) against all non specifically minted gold coins sold by banks (excluding loans against gold ornaments and other jewelry). To wit:
As per extant instructions, banks are currently permitted to grant advances against gold ornaments and other jewellery and against specially minted gold coins sold by banks.However, no advances can be granted by banks for purchase of gold in any form, including primary gold, gold bullion, gold jewellery, gold coins, units of gold exchange traded funds and units of gold mutual funds. While there may not be any objection to grant of advances against specially minted gold coins sold by banks, there is a risk that some of these coins would be weighing much more, thereby circumventing the Reserve Bank’s guidelines regarding restrictions on grant of advance against gold bullion.
Ironically, without imposing specific dimensional limitations, there was the risk that India may boldly go where only a bunch of financially illiterate, click-baiting media dilettantes, desperate to pitch the idiotic idea of a “trillion dollar coin” made out of platinum to bypass the debt ceiling limit (at least until the Treasury was forced to firmly crush this nonsense with a just as idiotic public statement), and arbitrage RBI directive loophole to create a massive coin, against which banks would subsequently lend out cash.
Today, any hope that India may indeed be the first real source of a trillion dollar coin, one made out not of platinum but gold, were crushed, following a clarification by the central bank that there is a firm, 50 gram weight limit on all permitted “specially minted gold coins.” From the RBI:
Since specially minted gold coins sold by banks may not be in the nature of “bullion” or “primary gold”, it was indicated in the mailbox clarification dated April 5, 2011 that there would be no objection to the bank granting loans against these coins. However, as pointed out in the monetary policy statement, there is a risk that some of these coins would be weighing much more, thereby circumventing the Reserve Bank’s guidelines regarding restriction on grant of advance against gold bullion.Accordingly, it is advised that while granting advance against the security of specially minted gold coins sold by them, banks should ensure that the weight of the coin(s) does not exceed 50 grams per customer and the amount of loan to any customer against gold ornaments, gold jewellery and gold coins (weighing up to 50 grams) should be within the Board approved limit.
Well, there goes any hope of a “coin” weighing several million tons. It also means that the record for the world’s largest gold coin will remain with the Australian Mint and its 1 tonne gold coin for quite time.
Also of note in today’s RBI, was the clarification that no loans made against ETF shares as “collateral” may be made either. This will hardly come as news to anyone, considering nobody really knows how many times, and to whom the primary gold in said ETFs has been lent out, rehypothecated, and otherwise seen its ownership title diluted to near zero.
…we have also been receiving references from certain banks asking whether advance against units of gold Exchange Traded Funds (ETF) and gold Mutual Funds is permitted.As these products are backed by bullion/primary gold, it is clarified that the restriction on grant of loan against “gold bullion” stipulated in terms of our circular dated July 22, 1978 referred to at para 2 above, will also be applicable to grant of advance against units of gold ETFs and units of gold Mutual Funds.
Ironically, loans made out against solid-gold shirts such as this one appear to still be perfectly valid. Expect much more (and much heavier) golden clothing in the coming weeks and months as demand to lock in “low” rates (in this New Normal who can possibly justify a 7.25% rate as low? Apparently, several hundred million inflation-weary Indians, that’s who), finds ways to bypass all regulations.
Finally, and just in case there is any confusion whether Indian demand for gold will subside, the following warning uttered by FinMin Chidambaram …
… has assured that demand for gold, of any shape, size, and denomination will surge even more. Because nothing makes an object more sought than the government threatening to prohibit it. As a reference, please see the ammunition in inventory in your local neighborhood Wal-Mart.
This article was posted: Tuesday, May 28, 2013 at 4:31 am