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Commentary

Reliance Capital Displays Patriotism By Not Selling Gold

Reliance Capital has decided not to sell gold as an investment product, in a press release that defies imagination:

Reliance Capital, a part of the Reliance Group, strongly supports
the Government’s publicly stated objective of minimizing gold imports that are seriously
hurting the country’s economic interests.

The Company has decided to suspend sale of gold in physical form (including inter alia
supply of gold coins for sale through India Post), and also as an investment product,
across all its businesses and subsidiaries.

In addition, Reliance Capital’s Commercial Finance Division has decided to suspend
financing against gold as a security.

Further, Reliance Capital Asset Management (RCAM), a part of Reliance Capital, has
decided to suspend new subscriptions in Reliance Gold Savings Fund. Existing SIP
investors will not be affected by this decision

This doesn’t make too much sense. I don’t believe that any such stopping of gold sales is in any way related to helping the government or anything like that. Colour me cynical, but businesses aren’t built on such shallow patriotism. Plus, if the group that owns Reliance Capital cared about India’s economic interests, they wouldn’t be trying to launder money (alleged in a UK tribunal order against a UBS trader indicted of creating the vehicle).

So what else can be there? Suspending of commercial finance against gold as a security is probably a sound business decision – in the face of falling gold prices, they must be facing pressure on such loans as the collateral value has fallen. Additionally, with Reliance Capital vying to become a bank, they might want to get on the right side of the RBI about gold-based-lending, where RBI wants banks to curb all sorts of lending against gold.

Reliance Capital has about 2,200 cr. of AUM in the Gold Savings Fund, and sold about 5 tons (my estimate: 1,400 cr. worth) of  gold in 2013. (ref: Reuters) This is fairly large, but you have to note that they haven’t suspended the Gold ETF itself (which is what the Gold fund would buy). So you can buy the ETF but not the gold fund.

Reliance Capital would import most of its gold through banks. Due to a recent RBI directive, that avenue requires a 100% cash margin (versus buying on credit), which would have severely dented profitability. While the official statement is being spun as a Sahara-ish I-Love-My-Country view, it will do nothing to actually help the country (there are other sources to buy from) and it probably masks the real reason. I hope it’s not any more sinister than the situations I mentioned above.

  • achin says:

    Isn’t it done to contract the profitability margin? If they are not getting any margins to trade it on credit .. no reason to trade that. If we implement same rule across the board (all commodities / exchanges / countries); the problem of inflated prices would be resolved.
    PS: gold stocks are already trading down. Gitanjali is -20% already

  • Mks says:

    I completely agree with your views that there isn’t anything noble about their decision. It’s purely to get some brownie points and mislead investors. I feel that they lent so much against gold, they with prices falling, the collateral might not cover their loans.

  • Adithya says:

    Aren’t they just sitting on gold knowing that wedding season / festive season will eventually drive up gold demand and therefore price? I remember some banks last quarter wouldn’t sell you gold at a penny under 30k when the market was trading at 26k.

  • ARP says:

    “Additionally, with Reliance Capital vying to become a bank, they might want to get on the right side of the RBI about gold-based-lending, where RBI wants banks to curb all sorts of lending against gold.”
    I am always amused by the hypocrisy of RBI and FinMin. GoI pledged gold to stave off a BoP crisis in the past and is likely to do the same in the future. But they want to close this avenue for the common man.
    As someone associated with horticulture and farming, I have noticed it is common among small farmers to pledge gold as collateral for agricultural loans / purchases. Most of these gold loans are used for capital expenses – like drip systems, land-filling, tractor etc.
    Such directives tend to make it difficult for the lower-middle strata of society to monetize their assets for productive purposes.

  • Aditya says:

    Perhaps the reason for not suspending the gold ETF is that it is mere exchange of units and no new units are acquired?

  • Murty says:

    The contorversy about our National Anthem still reminds me the fact that it is not clear who is the ADHINAYAKA , being praised .
    Tavasubhanaame jaage…tavashubh aashiiis maange! Gahe tava jaya gadha……
    Punjaaba sindhu gujarata maratha, dravida utkala vangaa…. vindhya hmachala yamunaa gangaa..
    But who is this ADHINAYAK being praised? Jana gana mangala dayaka?
    Did you find any relavance to the article above with my tantrums????
    C O R R U P T I O N!

  • Surjit says:

    Is it advisable to invest in gold ETFs at this point of time?

  • Shankar says:

    This sounds like a typical dumb move.
    If the government or Reliance wants to be patriotic, they should encourage gold purchases through mutual funds.
    Of all the options to buy gold, buying through MFs is the most transparent/hard way. Where else would one be made to fill up KYCs and pay through bank cheques or ECS, even for small purchases of Rs.1000 a month?
    I started buying gold through Reliance MF this year via SIP. This announcement has made me jittery.
    Maybe they are encouraging me to just buy gold the way everyone else bought, over the counter, paying cash.

  • Ravi Shankar says:

    Agreed! Coming to the crux of the problem to address the anxiety of the Government.If you have an honest money system, anyone who purchased gold in the last many years would have paid a heavy price for purchasing a sinking asset. There is no better punishment than inflicting financial losses on your actions. If we used sound money, gold has no place in any persons asset class. Btw, All gold purchasers would be proved right, in a few years time when its price in measured in Lakhs of rupees per 10 grams 🙂 !

  • mahes says:

    Patriotism… my foot.

    • Murty says:

      Sakuni’s family was humiliated because Dhritarashta / Bheeshma… etc wanted to punish them as they keep the secret of Gandhari’s first marriage before she married Dhritarashtra. They were all kept in a dark room where only one grain a day was supplied to them. So , they realized that they are soon going to die, and plotted the downfall of Kaurava’s. They went on starving, and died, while all the 21 grains or so were given to only Sakuni, and he made the Magic Dies with theie bones and planned to use them against Kauravaa’s. Duryodhana, came to know this and turned the foe into his ally, but Sakuni’s anger did not dissipated . He always tried to arouse the EVIL EGO in Duryodhana, which eventually led to the WAR… so says MAHABHARATA……
      The relevance is still valid today… there are Sakuni’s, Dhritarashtra’s, Pandavas, Karna’s and…..so on so forth….
      Who is Deepak Shenoy?????……..mmmmmmmmmmmmm! let me guess!!
      Yes, Sanjaya………..the Ankho dekha haal!!!!

  • Reema says:

    Read somewhere that the poem was originally written to praise ‘King George the 5th’. Says so at ‘ gahe tav jay gatha’. Vande mataram makes sense as an anthem.

  • Phoenix says:

    My guess is that this has to do with compliance with RBI regulations for obtaining banking licence. Also likely that they will get the licence regardless of everyone’s comments. Search me !!!

  • Murty says:

    A Reliance Bank of India? YAK!
    RBI! RBI! RBI! RBI!