Loans against gold may support small businesses post Covid reopening

Gold is typically the only asset small entrepreneurs have in order to raise funds. Large quantities of the metal may also come in to be sold

Small units are now looking to mortgage their family-owned gold jewellery to get out of the slump caused by the Covid-19 pandemic.

“For small units, gold jewellery is the only option to get funds. Hence, we see a sharp increase in loans against gold to fund small businesses once markets open,” said Somasundaram P R, managing director-India, World Gold Council, while speaking at a webinar organised by the PHD Chamber of Commerce on Thursday.

Small businesses like fruit and vegetable vendors, roadside eateries, or even teastall owners avail of private funding. But, given the job losses and economic distress among the middle class, arranging for funds to restart their business is proving a tough task for them.

“While a huge haul of such gold would come for selling, a large number of businesses would mortgage their gold to secure immediate cash,” said Somasundaram.

Explaining the need for investors to expand their portfolios, Somasundaram said gold had proved to be a good portfolio diversifier, regardless of the price at which consumers bought it.

Gold has yielded 60 per cent returns since January 1 last year with low inflation at a time when all other asset classes fetched negative returns.

The metal has set a big entry barrier, Somasundaram said, with its record high price of Rs 50,000 per 10 gm. Paper gold like exchange-traded funds (ETFs) and sovereign gold bonds, and digital gold have proved consumers’ preferred choice.

Gold demand is expected to bounce back in India by Diwali with a focus on investment products like bars and coins with low conversion charges. Thus, jewellery demand is expected to remain subdued.

Meanwhile, the world market is likely to see surplus gold this year owing to a sharp contraction in demand, especially in eastern markets led by India and China. But, prices may remain elevated despite oversupply.

The data compiled by Metal Focus, a global consultancy, forecasts supply to outstrip demand by 50 per cent this year. This is after an almost similar surplus in 2019 too.

“We forecast gold supply to remain at 4,762 tonnes (4,831 tonnes) for 2020 as against its demand at 3,171 tonnes (3,959 tonnes). Thus, the gold market will remain hugely oversupplied. This is, however, unlikely to support any weakness in gold prices,” said Philip Newman, director and founder, Metal Focus.

Newman forecast gold prices to test $1,920 an oz (one ounce is 31 gm) by December from its current level of $1,860 an oz and average at $1,700 an oz this year and $1,800 an oz next year on benign US Fed interest rates.

Jeremy East, chief executive officer, East Wind Capital (a global consultancy), said: “While the east is selling gold at a $20 discount, the west is buying it, with a huge stimulus package announced by the US government and a massive package approved by the European Union.” 

While the US has pumped in a stimulus of $4 trillion, the European Union has announced a package of 700 billion euros.