The gold glow may fade in the long run

With 10 grams of gold going for over Rs 60,000, gold prices have breached their previous all-time highs.

Indeed, this is quite worrisome news for the gold-obsessed Indian retail consumer. And the buzz is that the topline of NBFCs and banks that lend against gold is about to get a significant boost.

Historically, that has been the case; every time there has been a significant movement in gold prices, it has impacted the loan book value and revenue of gold financiers.

So going by the historical data, we can expect a surge in the earnings of gold financiers. Right?

Well, maybe for the short term. But we doubt this will change the fortunes of companies that lend money against gold. Here's why.

The volatility of gold prices. Gold prices are highly volatile to macro factors. Anytime there are any signs of global distress and investors fear a rampant inflationary period is coming, they put their money on gold, and there's a rise in prices. But the reverse is also true. As soon as fears subside or central banks raise interest rates, gold prices drop. This also happened last year when the Russia-Ukraine conflict broke off. Initially, there was a surge in gold prices. But as soon as the war was not hot news anymore, the rally stopped.

Thus, while the current surge will have some short-term benefits, it will be business as usual in the long term.

Bad loans. Loan book growth without a robust underwriting process can be a double-edged sword. While it's true that better gold prices mean better collateral for gold companies, companies that have a history of giving out loans without proper robust underwriting won't fare any better from this rise in gold prices.

Rising competition. Ever since the pandemic hit, the gold loan space has become highly competitive. NBFCs, banks and gold financiers are trying to capture the market, which means that attracting borrowers will come down to who can give out loans at the cheapest rate.

Suggested read: Gold outshines equity and debt in 2022