Paul Fernandes, a 50-year-old waiter in India, took out a loan last year using his gold as collateral to pay for his children’s education after losing his job on a cruise ship. This year, he is selling gold jewelry to cover expenses, after unsuccessful attempts to start a home business and find another job.
“The golden loan is a debt that I am taking over,” he said from his hometown in Goa. “Selling my jewelry means I don’t have to pay anyone back with extra interest on it.”
With a pandemic pushing millions into poverty or bankruptcy, many Indians are now turning to their last resort: selling their gold jewelry to make ends meet. In rural India, the largest buyer of leverage, a brutal new wave of viruses has had a catastrophic impact on the economy and income. With fewer banks nearby, people in rural areas rely on gold in times of need because it can be easily liquidated.
The likelihood of financial trouble caused by the second wave is much higher and could lead to more complete gold sales, unlike in 2020, when consumers decided to take out loans against their metal stock, according to Chirag Sheth, an adviser at London-based Metals Focus Ltd.
The gross supply of waste – which includes old gold melted down to make new designs – could exceed 215 tonnes and rise to a nine-year high if a new wave occurs, he said. For a country that imports almost all of its gold mainly from Switzerland, a larger local supply will also limit the inflow abroad.
“Last year you already had financial problems and you got out of that problem with loans in gold. This year, too, you have financial problems with a potential third wave on the road, which in turn could mean a lockout and job loss, ”said Sheth. “We can largely expect sales in distress in August and September when the third wave could actually begin.”
Many Indians who have emerged from poverty face bleak job prospects as locks have crippled the economy. More than 200 million returned to work earning less than the minimum wage, or $ 5 a day.
Signs of trouble
In the initial sign of consumer stress, Manappuram Finance Ltd., one of the largest suppliers of gold loans, sold 400 crore ($ 54 million) of gold from loans that became acidic after a sharp drop in prices in three months to March.
That compares to just £ 8 auctions in the previous nine-month period. Jewelry was sold because Manappurama borrowers – usually diaries, small entrepreneurs and farmers – could not afford to repay the money.
In South India, the country’s largest consumer per capita, about 25 percent more old gold than usual was sold to jewelers, according to James Jose, CEO of CGR Metalloys Pvt refinery based in Kochi.
“Once locked, the stores are open and you can see very good steps in them for two reasons: one is a purchase related to the wedding season and a certain amount of liquidation for cash,” Jose said by phone.
The Indians have reduced their purchases of gold in recent years as a weak economy and a virus outbreak have reduced their spending power. According to the World Gold Council, in 2020, gold sales fell to their lowest level in more than two decades.
Still, demand could recover this year, up as much as 40 percent from last year, driven by falling prices and about 50 tons of latent wedding purchases shifted into this year from 2020, according to Sheth of Metals Focus.
“The third wave remains the biggest risk for our assessment,” he said.