Banks may raise margin requirement for gold loans

BS Reporter  |  Mumbai  April 18, 2013 


Banks have started reviewing the margin after a sharp fall in gold prices

Following a sharp fall in gold prices over the past few days, banks have started reviewing the margin requirement for loans against the yellow metal.

After dropping Rs 3,160 over the last three sessions, gold prices on Wednesday fell Rs 90 to Rs 26,350 per 10g, the lowest level since August 17, 2011, on sustained selling by stockists against restricted buying.

Typically, most public sector banks maintain a loan-to-value ratio of 70 per cent, while it is higher for some private-sector lenders. Top executives of government banks said they had already reduced the amount they used to lend per gram of pure gold.

“The amount of loan is dependent on how much pure gold is available with the borrower. Earlier, for 1 g, we used to lend Rs 2,300. We have reduced it to Rs 1,700. We will also review the loan-to-value (LTV) ratio,” a senior banker said.

State Bank of India Chairman Pratip Chaudhuri had yesterday said his bank would raise the margin requirement. “Generally, we keep a 30 per cent limit (of value). Yes, we will have to review that. That (LTV) will be adjusted. We would be revising our advisory for gold loans with the valuations (dropping),” he had said, adding gold prices had dropped but were still above 70 per cent of the peak value.

SBI, which has Rs 35,000-crore of gold loans on its books, however, said there was no immediate impact.

The finance ministry has also swung into action. In an interview with Bloomberg, Financial Services Secretary Rajiv Takru said banks would review loans backed by gold and call for more collateral as the price of the metal fell.

When gold prices started falling, the central bank immediately called on banks to review lending, Takru said.

MCX gold below Rs 26,000: Here’s why bullion is crashing

FP Staff Apr 16, 2013

Gold futures prices on the Multi Commodity Exchange today fell to a 15-month low of Rs 25,270 per 10 grams tracking the international markets, where the metal witnessed its biggest one-day drop since 1983.

Gold prices, which had been plummeting since last week, fell another Rs 364, or 1.41 percent, to trade at a 15-month low of Rs 25,270 per 10 grams for delivery in June.

Here are seven reasons why the bullion is crashing

1. Global inflation is falling: According to the JPMorgan index, global inflation peaked at 4 percent in 2011 and has fallen steadily since. Global prices in February were up only about 2.5 percent from a year earlier. This reduces gold’s value as a hedge against rising prices. Hence, those betting on an outburst of inflation are scrambling to reverse their bets and exit gold positions at any price.

2. Rise of dollar: Another reason for gold’s short-term weakness is the rise of the dollar due to the economic crisis in Europe. The dollar has also moved up on the hopes that the US economy is emerging from its crises, which could nudge the Federal Reserve to withdraw the stimulus package earlier than expected. Analyst say that the Fed has given the signal that there’s a possibility to reduce QE and that took a lot of trust out of gold.

3. Worries over Chinese growth and a possible sell-off by struggling Cyprus’s central bank also pushed down the precious metal’s prices in the futures trade. Cyprus has created the fear that countries may sell gold in order to restore their sovereign balance sheets.

AFP

Reports are doing rounds that Cyprus is planning to sell some of its gold holdings. A European Commission assessment showed it was set to sell gold reserves to raise around 400 million euros ($525 million). While Cyprus’ gold sale in itself is small, heavily indebted euro one nations such as Italy and Portugal could also find themselves under increasing pressure to put their bullion reserves to work.

Market analysts said sustained weakness in the overseas markets where gold plunged over 9 percent yesterday to its lowest price in two years, put pressure on the precious metal prices in India.

4.  A shift out of commodities into equities and bonds: Again the return of confidence in the US economic recovery, has seen investors move away from safe havens like gold into more riskier assets like gold.

According to an HSBC report, gold and the other precious metals have been weighed down by overall weakness in the commodities sector this year. In fact, the move down in silver has exceeded that of gold. Two major commodities, oil and copper, are also down 9 percent and 14 percent since mid February. Gold may simply be playing catch-up.

In contrast, the S&P 500 is up over 10% so far this year.

“It appears that commodities – including precious metals – have not benefited from the reflationary policies of central banks which include record low interest rates and massive balance sheet expansion. Instead financial assets, including bonds and equities have been the main beneficiaries. This may explain a switch away from gold. It also helps explain the steady outflow from gold-Exchange Traded Funds (ETF) this year.”

5. Paper gold holders are weak hands: According to James Kostohryz of The Street, the crisis today is the result of paper gold, i.e. gold ETF purchases in the past which allowed speculators to trade gold without having to actually buy, store and insure it. “Gold was being bought by them for essentially the exact same reasons that people have been buying Bitcoin: Pure speculation about doomsday scenarios, combined with a greed-laced ambition to capitalize on such calamities,” he says.

Hence as the gold price turns on speculators, they will simply dump  it as impulsively as they bought it.

6. The announcement of a massive easing policy by the Bank of Japan. Japan’s easing monetary and fiscal policies could export Japanese deflation. While this may not be a valid explanation it is entirely possible that the lack of global inflationary pressure is working against gold.

7. Sentiment has suffered due to recent cuts to price forecasts for the precious metal and outflows from gold exchange-traded products. Goldman Sachs lowered its average gold-price forecast for 2013 to $1,545 an ounce. Deutsche Bank has cut its 2013 gold price forecast, saying returns from the metal may be on course for their worst annual performance since 2000.

According to HSBC, the robust gold bull rally of the past 12 years is probably over. “It may take a long time for investor confidence to return. But we do believe gold is becoming oversold and that tighter supply/demand fundamentals and a still positive macroeconomic background, will eventually lead  to a steady grind higher.”

Manangement Tip of the day :Perfect Your Personal Elevator Pitch

 HBR :APRIL 18, 2013

If you’re in the market for a job, you need to be able to communicate your value as a potential employee in 15 seconds or less. 

That may be all the time you have with a recruiter or hiring manager. 

Your message has to be crisp and tailored. 

Say specifically what value you bring — for instance, “My specialty is streamlining messy, complex processes” — but don’t pile on so many details that you struggle to get everything in. 

Delivering an elevator pitch at breakneck pace is extremely off-putting. Speak at a steady pace that shows you’re calm and confident.

 You want the listener to see you as a thoughtful, deliberate candidate — not as some manic babbler.

Adapted from the HBR Guide to Getting the Right Job.

Gold futures down on weak global cues; subdued domestic demand

PTI ::New Delhi, April 18, 2013
Gold prices fell 0.90% to Rs. 25,447 per 10 grams in futures trade on Thursday, on increased offloading of positions by participants taking cues from the global market.

Besides a subdued demand in the spot market, where the precious metal dipped to a 20-month, low also weighed on the prices.

At the Multi Commodity Exchange, gold for delivery in June eased by Rs.232, or 0.90%, to Rs. 25,447 per 10 gm in business turnover of 3,383 lots.

Likewise, the metal for delivery in far-month August shed Rs. 221, or 0.85%, to Rs. 25,886 per 10 gm in 115 lots.

In the spot markets, gold prices dropped to Rs. 26,350 per 10 grams, its lowest level since August 17, 2011 in the national capital. Prices have dropped by Rs. 3,250 in the last four days.

Analysts said a weak trend in the overseas markets on speculation central banks in Europe may sell holdings to raise funds and that a US recovery would curb demand for the metal as a protection of wealth, mainly weighed on the gold prices at futures trade in New Delhi.

Globally, gold fell 2.8% to $1,337.86 an ounce in Singapore on Thursday.

Tumbling global gold price eats into RBI’s forex reserves

On Wednesday, the gold price rose 1.32% to $1,386 per ounce. At this price, RBI’s gold reserves are valued at $24.85 billion, down 27.08% from its September 2011 peak. Photo: Bloomberg



livemint :Dinesh Unnikrishnan    : Wed, Apr 17 2013. 11 58 PM IST

Value of RBI’s gold reserves has declined from $34.08 bn in September 2011 to $24.17 bn early this week

Mumbai: The value of gold reserves with the Reserve Bank of India (RBI) has dropped 29% after international gold prices crashed last week following speculation that Cyprus may sell its gold reserves to rein in its ballooning fiscal deficit.

The value of RBI’s gold reserves—557.75 tonnes—declined from $34.08 billion (around Rs.1.84 trillion today) in September 2011, when the international gold price peaked at $1,900.23 per ounce (28.35 gram), to $24.17 billion early this week, when the yellow metal tumbled to its 26-month low of $1,347.95 per ounce.

Economists and analysts are playing down the impact of this on the Indian central bank’s reserves as the decline in value is notional. In fact, RBI has made substantial gains from the acquisition of gold reserves in the last one decade, they said.

“Looking at the average cost of acquisition of RBI’s gold holdings, gold has brought significant gains to it as the prices have gone up in the last decade. The current loss is only notional,” said Gaurav Kapur, India economist at Royal Bank of Scotland NV.

On Wednesday, the gold price rose 1.32% to $1,386 per ounce. At this price, RBI’s gold reserves are valued at $24.85 billion, down 27.08% from its September 2011 peak.

Last week, the European Commission said Cyprus may have to sell gold worth about €400 million (Rs.2,840 crore) to rein in its fiscal deficit. If the 13.9 tonnes sale takes place, this will arguably be the largest such disposal by a euro zone central bank since France sold 17.4 tonnes in the first half of 2009.

Gold as a percentage of RBI’s total reserves has been declining since the mid-1990s. It constituted 20% of the reserves in 1994, but dropped to 2.98.% by end-September 2008. RBI then bought 200 tonnes of gold from the International Monetary Fund (IMF) in November 2009, following which the share of the metal in the total reserves rose above 8%.

The 2009 gold purchase from IMF was seen as part of efforts by global central banks such as those of China, Russia, India and some European Union nations to shore up gold reserves and safeguard the reserve position of their economies in the event of a financial crisis. The objective was also to diversify assets.

Traditionally, RBI values its gold reserves at the end of the month at 90% of the daily average price quoted on the London Metal Exchange.

Apart from gold, RBI’s foreign exchange (forex) reserves include foreign currency assets, special drawing rights, and reserves held with IMF. Foreign currency assets consist of sovereign bonds, mainly US treasury bills. Buying more gold will help the Indian central bank diversify its assets. RBI’s gold holdings include the acquisition of gold worth $191 million from the government in 1991-92, $29.4 million in 1992-93, $139.3 million in 1993-94, $315 million in 1994-95 and $17.9 million in 1995-96.

On the other hand, the Indian government has been buying back gold from RBI to meet its own repayment needs. For instance, the government bought back 1.27 tonnes of gold in 1997 and 38.96 tonnes in 1998 from RBI to meet redemption obligations under a gold bond scheme.

Globally, central banks are among the biggest losers in the latest price crash as they own 31,694.8 tonnes, or 19%, of all the gold mined, according to the World Gold Council (WGC) in London. Sliding gold prices have eroded $560 billion from the value of central bank reserves, Bloomberg reported on Wednesday.

Around $773 billion was wiped from the value of all gold holdings globally on 15 April, taking them to around $7.5 trillion from $8.3 trillion last week, based on futures and a 2011 estimate by WGC that 171,300 tonnes of the metal have been mined.

The amount erased is greater than the market capitalization of all the stocks trading in Singapore, according to data compiled by Bloomberg.

In 1991, the Indian central bank had to pledge 67 tonnes of gold to Union Bank of Switzerland and the Bank of England to raise $605 million to shore up its dwindling forex reserves, when the country faced its worst ever balance of payments crisis. India’s forex reserves had declined to a mere $1.2 billion in January 1991. Currently, India’s forex reserves are at $293 billion

Quantitative capital controls can be distorting, inequitable: D Subbarao

REUTERS: MUMBAI, APR 18 2013, 11:24 IST

Quantitative capital controls have been more effective for India in the short term but such limits can also be distorting, inefficient and inequitable, said central bank Governor Duvvuri Subbarao.

India has set a cap of $25 billion for foreign investment in government bonds and around $51 billion in corporate bonds.

Subbarao, in his remarks at the IMF conference in Washington DC on Wednesday, said the real risk of intervening in the forex market to protect a depreciating currency was depletion of forex reserves and still not being able to push up the exchange rate.

His remarks were posted on the Reserve Bank of India's website on Thursday.

"It should also be clear that a failed defence of the exchange rate is worse than no defence. So, when you are intervening in the forex market, it is important to make sure that your intervention is successful," Subbarao said.

The RBI had been intervening in the forex market in the last two years to protect a sharp fall in the Indian currency. The Indian rupee hit a life-time low of 57.32 to the dollar in late June 2012 and has recovered nearly 6 percent since then.