Market Commentary 27 Sep 2017
Most investment advisors may think otherwise, but for people in rural India, gold is a necessary and desirable asset to hold. Some reasons are cultural, but because rural incomes are irregular and volatile – coming mostly at the end of the two harvest seasons – gold becomes a savings instrument of considerable liquidity.
There is another important factor. Large parts of the population have no access to bank credit or banking services; formal bank lending is on the basis of cash flow rather than assets, which for rural populations exists in two forms, land and gold. The first is illiquid and banks have very little expertise on gold.
Some experts argue that gold as collateral can be sold if the loan is not repaid; borrowers don’t fall into a debt trap, where escalating interest payments make the loan hard to service; a bad monsoon that disrupts farm output can burden a farmer and his family into a point of no return in their indebtedness.
In the last few years, non-bank finance companies have entered the loan market especially offering loans against gold; the processes are fairly simple, documentation is easy and farmers and rural households can get access to credit when they need it. In the opinion of many experts, gold loans are great instruments of financial inclusion, better than anything that the formal financial system has come up with.
The numbers are significant too. Private ownership of gold amounts to almost 24,000 tonnes with an estimated value of close to one trillion dollars; most of that is held by households and families, a significant number of whom live in rural India. On the other side of the equation, more than half of India’s output comes from the unorganised sector, which also employs nearly 70 per cent of the working population. Owners of businesses in that sector are potential borrowers who can use their gold savings as collateral.
In the context of financial inclusion, gold is a liquid asset whose value does not depreciate over the long term; it opens the door to credit that can be the lifeblood of business, and It can be easily sold in challenging times or emergencies.
The price of a particular commodity at a set future date is called the futures price. This price is arrived at by taking into consideration, various parameters such as time till the delivery, the current spot price, risk-free interest rate and storing costs at a future date.
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