Muthoot Gold ETF Loan

by Manshu on July 19, 2011

in ETF

I guess it was only a matter of time before this product was introduced. Muthoot Finance, which is India’s biggest lender against gold has said that they are going to start lending against gold ETFs too.

This was reported by several newspapers last week, and it’s a fascinating development in the gold ETF world. The first thing that came to my mind was that they can’t be worried about fraud at the ETFs if they are willing to accept that as a collateral instead of physical gold.

The second thing was didn’t someone recently ask about something like this?
Gold

About 3 or 4 weeks ago someone had emailed and asked if it was advisable to take a loan against gold, and then buy more gold with it because gold can only go up, right?

My predictable response was that it was a bad idea, but until today I hadn’t realized how bad it was. The Muthoot website shows that currently you can borrow Rs. 1,100 per gram of gold at an interest rate of 12%.

I don’t think it makes any sense at all to borrow at these rates with this little for the purpose of trading in gold! I can understand someone feeling the pinch, and having to pledge their gold to get money, but for trading? I don’t think so.

Business Standard reports that Muthoot is going to allow you to get up to 85% of the gold ETF value for a loan of up to 3 years at a diminishing interest rate of 24%.

I think they might have other options as well where they allow you to take a lower amount for your ETF, and charge a lower rate of interest, but even those should be comparable to the gold loan interest rates, and therefore will be bad to borrow and trade with.

I can understand that gold loans are an important way for some people to tide over rough times, and this will only broaden the options available to such people, and while that makes absolute sense to me; I can’t see this being a good way to leverage up, and trade in gold.

But I know for a fact that a lot of the lending will happen to trade, and especially if everything can be done online. If people have to take print outs of Demat statements, and fill up forms etc. then that acts as a bit of a deterrent and ETF loans for trading may not catch as much appeal as margin trading does, but if it is all online then that is more encouraging.

What happens only time will tell, and hopefully it will prove that I’m being unduly skeptical.

Image by Hair Flick

{ 4 comments… read them below or add one }

Ramesh July 19, 2011 at 11:58 am

gold etfs can be sold so easily online and as is the case mostly with gain. then why one would take a loan @ 24%? when we have extra finds we can buy again.

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Manshu July 19, 2011 at 10:51 pm

For speculative purposes, this will be done by people who are convinced that gold will rise more than 24% in a year, or that they can trade to make more than that in a year.
It’s like having a 100K worth of ETFs, pledging it and getting Rs. 85K and then buying more ETFs with them in the hope that it will rise more than 24% and you will make money on the deal even with the interest.

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Ramesh July 19, 2011 at 11:36 pm

thanks Manshu. speculators do take high risks!

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Manshu July 21, 2011 at 5:26 am

Yeah, some of them really do. In fact I remember someone giving this type of advice in one of the comments here itself. Something about pledging physical gold, and buying stocks, of course, these are the kind of advisers that go bankrupt when the market crashes, which it does tend to do every few years.

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