How Gold Boosts Liquidity

In the U.S.,  gold is a often a means of storing, and growing wealth. In 2020 gold served this purpose well as its value climbed more than 24%. However, many gold investors in the U.S. are unaware of the unique ways that gold boosts liquidity for consumers abroad.

Gold ownership is common in Indian culture as it represents a level of economic status and often has cultural ties to special events, like marriage, in which it serves as a popular gift. As a result, India represents the highest demand for gold jewelry than any other country in the world. The popularity of gold in the country is one reason why so many people use it for more than ornamentation; they also use gold to boost liquidity.

It is common for gold owners in India to pledge their holdings as collateral for loans. Gold is an optimal asset for this purpose because its value is understood by all. Borrowers often enjoy faster loan processing times without onerous paperwork assuring income levels, or credit history. Moreover, a rise in the price of gold unlocks greater borrowing potential for loan seekers in the country.

Given the power of this relationship it is not surprising to learn that just over half of investors in India own some form of gold and that the average Indian household retains 11% of their wealth in gold. It is easy to see the appeal of gold ownership in a country where gold has generated an average annual return of 10.14% compared to an average annual return of 8.11% seen on the BSE SENSEX, an index of 30 companies on the Bombay Stock Exchange.

The relationship between gold and liquidity has increased in recent months as the pandemic continues to take a toll on personal finances. As gold-backed loans have soared so has competition among banks for the lending opportunities. Banks like HDFC, Federal Bank, Muthoot Finance, and Manappuram are all increasing the loans they issue in which gold serves as collateral and today India is home to a $46 billion gold loan industry.

To gain the full scope of this amount consider that as recently as late March of 2020 Muthoot and Manappuram together hold 248.4 tons of gold pledged by borrowers. This total equals nearly half of the European Central Bank’s reserves.

The ability to acquire short-term financial relief from gold underscores the far-ranging value of the asset. Gold can operate not only as a growth instrument and a reserve of wealth. It can also serve as an important bridge over the chasm that occasionally opens when the global financial picture fractures.

For the moment, it appears that the borrowing power unlocked by gold is a characteristic enjoyed abroad far more than it is in the US. Part of the reason for this difference is the fact that gold ownership among individuals is more normative in other countries. In the wake of the COVID crisis US households may awaken to the untapped potential of gold to provide financial security in the event of disaster.  

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