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How fall in gold prices could endanger your deposits

Borrowing against gold has reached unprecedented levels in the last few years. As a result, gold finance companies have been enjoying the limelight for quite some time now.

However, with the recent softening in the prices of gold, we could be staring at a big problem.

As we all know, gold finance companies give loan against gold. Normally they finance around 75% of the value of gold. However, as the price of gold has corrected from around Rs.33,000/10 gm to about Rs.26,000, this margin that gold finance companies had, is practically eroded. 



Therefore, if the borrowers default in repaying the loan (or delay payments), gold finance companies could end up with huge losses...or at the very least face a serious cash crunch.

Now, quite a lot of money that gold finance companies have lent against gold, is in turn borrowed from somewhere. They haven't invested their money entirely to fund the business. Some of this has come from banks. But quite a lot has also been borrowed from retail investors through fixed deposits and debentures.

Therefore, when the gold finance companies face financial pain, the same in turn would be felt by their bankers and depositors too.

If you have invested in the fixed deposits or debentures of such gold finance companies — which many did as they were offering high interest rates — you should be worried...really worried.

While fixed deposits are difficult to close prematurely, you at least have the option to sell your debentures which are listed on NSE/BSE.

Should you use this option?

Well, if you have substantial exposure...yes...better to be safe than sorry. 


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