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The Lack of Credit to Buy Gold is Looking for “Alternate” Mechanisms


HDFC Bank has stopped accepting credit cards as a payment method while selling gold. It has also yanked off the “EMI” scheme for jewellery purchases, where you could pay jewellers with your credit card and then pay back your card in equal monthly installments.

The main reason is that banks are no longer allowed to give any form of credit for the purpose of buying gold. A credit card purchase is actually credit to you for 45-50 days, and an EMI scheme is really credit (except the builder pays a fee) and if you use the money to buy gold, that’s not allowed.

Btw, a bank can lend you money AGAINST gold jewellery as collateral. Presumably the purpose of that loan is different!

In India, all bank lending has “purpose” codes, and you have to qualify the end-use of every loan that is made. For instance, taking a loan to buy a house is a housing loan, but borrowing money with your house as collateral is a “personal loan” and will not get treated as a housing loan. Housing loans have lower provisioning requirements and might qualify as priority sector lending in certain cases.

But this leads, eventually, to strange situations and arbitrage. In the above example you could borrow from your father to buy a house, and then ask for a loan against your house to repay your father; you will get a higher interest rate loan than if you took a loan directly against your house. Another example: RBI has been worried about banks’ exposure to real estate builders. So they restricted the loans banks could make to builders. Builders got smart real quick and then offered customers “We pay your EMI” deals – where the loan is taken in your name, but the interest is paid by the builder until construction. Officially, this is not a bank exposure to the builder, but if you have even an ounce of common sense, it really is.

Given that RBI’s order to terminate all credit to buy gold is a recent one, the gold arbitrage is yet to be setup. Currently the mechanism is complex – you have to borrow money, pay the jeweller, use the gold as collateral for a loan, and then pay back whoever you borrwed from.  It will be quite easy eventually – there will be a “personal loan representative” sitting in the jewellers office. Remember, a personal loan is not a gold loan. The rep will get a person a “preapproved personal loan” in an EMI scheme, approved over the phone, at which time the buyer can swipe a debit card to pay for the gold. There is a small cost – the interest – which will be a discount given by the jeweller.

If the point is to cut the supply of gold, but demand remains high, this will not succeed. Gold will be smuggled in. People will pay upfront – maybe a couple of days in advance – so that gold can be procured (since the jeweller can’t get credit). A large jewellery firm will set up a unit abroad, borrow short term from a bank there, and then ship it to India. As long as there is demand, there are ingenious ways people will find to buy what they want. It will take a few months, but that demand won’t just disappear.

But the chart looks plain ugly. And the metal is down another 3% today.


This makes sense since India is a substantial part of world gold sales. Eventually, when India figures out how to import gold without credit, we’ll find out how volumes are (lower, higher, or otherwise). That will tell you how gold will move – right now, there are temporary dislocations that artificially reduce supply.

While it has been a great investment, it might be time to consider getting out of gold as it breaches 25,000. There are great reasons to hold it longer, but this is a falling knife and I wouldn’t buy more right now. And the price has been talking and now it’s kinda shouting it out.

Disclosure: Long gold.


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