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Gold Backed Loans: Creditors be Comforted-the Weak Hands in the Gold Market are out!

May 30, 2013

Lenders who have given out loans collateralised with gold must have experienced some heart stopping moments during the last few months as gold prices sharply cracked. We would not be too concerned about taking credit exposures to gold loan companies (provided the LTV of the loans is 60% or below).

Gold is passing from weak hands (leveraged players, speculators and hedge funds) to strong hands (Indian, Chinese and Vietnamese housewives etc). The speculator such as Soros has to close out his position at some point. The gold that goes to an Asian housewife is forever removed from the market unless there is a deep financial crisis in the family.

Gold demand in India, the world’s largest buyer, is heading for a quarterly record after prices slumped to a two-year low in April, the World Gold Council said. India’s gold imports will be 300 to 400 tonne in the second quarter, almost half total shipments for all of last year. Gold auctions run by the State Bank of Vietnam were fully subscribed and some retailers in Japan ran out of stock. Weak hands sold 477.7 tonne valued at about $21 billion from exchange-traded products this year. The buyer was the strong hand. Throw in the demand from central banks of countries running current account surpluses (again strong hands, as opposed to weak hands running current account deficits), we would be sanguine about gold’s long term prospects. And the creditworthiness of lenders whose business model is built around lending against gold.


From → Credit Analysis

One Comment
  1. Aside from precious stones ladies also love gold. It is in times of difficulties they give up what they tightly hold. For now there are a lot of gold loans.

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