I own gold

I own gold.

Not much. A few coins in a box at the back of a cupboard. I bought them years ago and I forget they are there for months at a time.

I have never once thought of them as collateral. They are just something I own.

In India nobody forgets. A gold chain there is the household savings account. It goes to the wedding. It sits in the cupboard for a decade. And when the school fee comes due or the shop needs stock, it goes down the street to a branch office and comes back as cash before lunch.

That part is a hundred years old. The price is what changed.

Gold set a record near $5,600 an ounce in late January. So the same bangle that borrowed one lakh two years ago borrows two now. No family had to save anything. The collateral did the work.

And the loan book doubled. The Reserve Bank of India publishes sectoral credit numbers every month. In the year to May 31, loans against gold jewellery grew 105.5%, to about Rs 5.1 lakh crore.

Every personal loan in India put together grew 15.4% over the same year. Credit card balances grew 1.3%. Consumer durable finance shrank.

Gold loans are 7.3% of the country's personal lending now. Two years ago they were under 2%.

The loans also look immaculate. Overdues past ninety days ran at 0.2% in March, down from 0.4% three years earlier.

But a gold loan is not a loan against a person. It is a loan against a price. The lender does not ask what you earn or check what you owe. It weighs the chain, tests the purity, and hands over a percentage of the melt value.

So the credit quality of the whole book is one commodity quote.

That quote fell more than 20% in the second quarter. Gold's worst quarter since 2013.

On the first morning of that quarter, a new rulebook took effect. The Reserve Bank raised the maximum a lender may advance on a small gold loan to 85% of the metal's value, up from 75%. More money against the same chain, starting the day the chain began getting cheaper.

I have no idea when that bites. Gold is back near $4,600. Most of these borrowers have pledged before and paid before, and the average loan still sits well under the cap…

But the fastest-growing loan in a country of 1.4 billion people is underwritten by a metal, and the metal has already had one bad quarter. That is what worries me.

The companies at the centre of India's jewellery lending are not obscure. Muthoot Finance and Manappuram Finance run thousands of branches, and between them they have turned a village pawnbroking habit into a listed growth industry.

Muthoot reported its June quarter on 3 August. Consolidated net profit rose 43% to Rs 2,825 crore. Loan assets rose 43% to Rs 1.92 lakh crore. On any ordinary reading, an excellent three months.

The shares fell more than 11% that day.

The market was reading the margin instead. Net interest margin dropped 297 basis points in a single quarter, to 10.41%. Nuvama cut its target price to Rs 3,300 and named falling gold prices as the reason.

A gold lender earns a spread, but it also sits on the metal. When gold falls, the loans it wrote at last quarter's valuation stop looking comfortable and the loans it writes today come out smaller.

So the profit line described the quarter that ended. The margin described the one that started.

The best quarter in the company's history, and the shareholders sold it.

And here is where it spreads. The regulator has been loosening into the boom, not leaning against it.

A new Reserve Bank framework took effect on 1 April. On loans up to Rs 2.5 lakh, a lender may now advance 85% of the metal's value. The previous ceiling was 75%.

The same overhaul dropped the requirement that a gold-loan company get prior approval before opening its thousand-and-first branch. That restriction dates from 2013, and it exists because the business went wrong the last time gold fell.

Manappuram is opening 500 new gold branches this year. Its gold book grew 98% in twelve months to Rs 57,006 crore, and gold is now 82% of everything the group lends. A year ago it was 65%.

It charges 17.7% on that book and guides to another 25% to 30% of growth this year. Muthoot, the bigger of the two, guides to 15%.

A lender that concentrated has not diversified into gold. It is a gold position with a branch network attached.

Meanwhile, the metal has changed hands.

Central banks bought 288.9 tonnes of gold in the second quarter, according to the World Gold Council. That is a quarterly record and 62% more than a year earlier. They bought all of it while the price was falling.

Exchange-traded funds went the other way over the same three months, with about 45 tonnes of net outflows, most of that in North America.

So the steady bid under the world's most widely pledged collateral now comes from official reserve managers. They do not publish their plans, they do not chase the price, and they are not trying to hold anybody's loan together.

That cuts both ways. Slow official buying puts a floor somewhere under the metal, which is more than most collateral gets. It also means the floor has nothing to do with the borrower.

Gold set its record near $5,600 an ounce on 29 January and trades near $4,600 today. A family pledging a chain in January and a family pledging the same chain this week are borrowing against two different numbers.

Three more things worth keeping track of.

European companies are failing at the fastest rate since before the pandemic. Eurostat counted a 5.7% rise in bankruptcy declarations across the EU in the second quarter, the highest reading since the start of 2019, while new business registrations fell. But the European Central Bank's May stability review puts the aggregate corporate bad-loan ratio at euro area banks at a historically low level, and explains part of that with the banks selling and working out problem loans rather than carrying them. Companies are going under. The lenders' books do not show it.

Washington and Tokyo intervened together in the currency market in late July, the first joint operation of its kind in decades. The yen went from about 164 per dollar to 155, then gave most of that back and now sits near 159. What happened in between is the interesting part. Japanese investors bought a net 5 trillion yen of foreign shares and long-dated bonds in the two weeks to 15 August, after net selling in the fortnight before, on Ministry of Finance figures. The rescue handed the carry trade a better entry price.

American truckload spot rates touched an all-time high of $3.83 a mile in early June and still ran about 38% above last year in mid-August. That should be a boom for the people driving. But the American Transportation Research Institute puts the average cost of running a truck at a record $2.336 a mile, and a Truckstop survey found 44% of carriers sitting on less than thirty days of operating cash. Record freight prices, and the hauliers are a month from empty. We'll see.

On 5 January 1998, Korean television asked the country for its gold.

The Korean Broadcasting System ran the campaign with six banks. Bring in what you have. The banks pay a set price. The gold goes abroad, comes back as dollars, and the dollars go to the International Monetary Fund.

Nearly 45,000 people came on the first day. They handed over 3,314 kilograms.

Half a million had come by the next morning. A million by 15 January.

They brought wedding rings and the small gold rings Korean parents buy for a baby's first birthday. Soldiers brought military insignia. Cardinal Kim Sou-hwan brought the cross from his anointment. Olympic champions brought their medals.

By the end of April, 3.51 million Koreans had taken part, about one household in four, and the total reached 227 tonnes.

It raised roughly $2.13 billion. The IMF package was $58 billion, so the entire national jewellery box covered 3.7% of it.

It was melted, shipped out and sold at the worst price gold would see in a generation.

Gold traded around $290 an ounce through 1998. By the summer of 1999 it had fallen to about $253, a twenty-year low. Those same 227 tonnes would fetch roughly $34 billion at today's price.

Korea repaid the Fund three years early, in August 2001. The campaign worked, the country recovered fast, and I would not take a word of that away from anyone who stood in those queues.

But look at the mechanics of it. Household gold is the collateral of last resort. Which means it moves at the moment of least choice, in the largest volume, all at once.

The people in that queue did not pick the day and they did not pick the price. The crisis picked both.

Collateral gets sold when its owner is out of options. We'll see.