Loans against gold may support small businesses post Covid reopening

Small business units are now looking to mortgage family-owned jewellery to fund their operations, which had shrunk during the (Covid-19) outbreak following restrictions on human and logistics movement.

“Small businesses have all but collapsed during the pandemic. Now, they are looking for capital to restart operations. For them, jewellery is the only asset they can use to get funds. Hence, we can see a sharp increase in against to fund small businesses once markets reopen,” said Somasundaram P R, managing director-India, World Gold Council, addressing a webinar organised by PHD Chamber on Wednesday.

Usually, small businesses like fruit and vegetable vendors, road-side eateries or even tea stall owners avail private funding to start their businesses. But, looking at job losses and economic distress within the middle class, arranging funds to restart operations is proving a herculean task for such business owners.

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

Explaining the need for investors to expand their portfolio, Somasundaram said that gold has proved a true portfolio diversifier at whatever the price consumers buy it. Gold has yielded 60 per cent returns since January 1, 2019 with low inflation at a time when all other asset classes fetched negative returns.

Speaking on demand, Somasundaram said gold has set a big entry barrier with its record high price of Rs 50,000 per 10 grams. Small ticket size of paper gold like exchange traded fund (ETF), sovereign gold bond and digital gold continued have proved preferred choice for consumers.

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

Meanwhile, the world market is likely to see a big surplus of gold in 2020 due a sharp contraction in demand especially from the eastern markets led by Asian giants like India and China. But prices may stay elevated despite oversupply.

Data compiled by the global consultancy Metal Focus, forecasts gold supply to outstrip demand by a staggering 50 per cent this year on weak consumer demand of jewellery and investment products like coins and bars. Metal Focus forecasts gold supply to outstrip demand by 50 per cent in 2020 after almost similar surplus reported in 2019 as well.

“We forecast gold supply to remain at 4,762 tonnes (4,831 tonnes in 2019) in 2020 as against demand at 3,171 tonnes (3,959 tonnes). Thus, gold market will remain hugely oversupplied. This is, however, unlikely to support bring any weakness in gold prices,” said Philip Newman, Director and Founder, Metal Focus.

Newman sees gold testing $1,920 an oz by December 2020 from its current level of $1,860, and averaging at $1,700 an oz this Calendar yera and $1,800 in 2021, on benign US Fed interest rates.

“While the east (including India and China) is selling gold at a $20 discount, the west is buying gold at a huge premium of $50, following a huge stimulus package announced by the US government and a massive package approved by the European Union,” said Jeremy East, Chief Executive Officer, East Wind Capital, a global consultancy.

While United States has pumped in $4 trillion of stimuls into the system, EU has announced a 700-billion-euro stimulus to prevent the economy from collapsing. Experts believe this stimulus would keep gold prices elevated in the near future as well.