The Reserve Bank of India (RBI) has banned banks from lending against gold.

“…it is advised that no advances should be granted by banks for purchase of gold in any form, including primary gold, gold bullion, gold jewellery, gold coins, units of gold Exchange Traded Funds (ETF) and units of gold mutual funds,” RBI said.

RBI further ordered,

“No advances should be granted by banks against gold bullion to dealers or traders in gold if, in their assessment, such advances are likely to be utilised for purposes of financing gold purchase at auctions or speculative holding of stocks and bullion.”

What happens in India is important to gold and silver investors.  India has traditionally been the largest buyer of bullion. In fiscal 2012,  India imported about 1,067 tons of gold.

Shares in gold finance companies Manappuram Finance and Muthoot Finance are showing relative weakness in Mumbai.

Non bank gold finance companies (NBFC) have been growing fast in India.  These companies typically lend up to 75% against gold including ETFs.  In comparison, in the United States, the maximum margin allowed for ETFs such as GLD and SLV is 50%.

Earlier this year RBI banned NBFCs from lending against bullion and gold coins.  RBI also made rules for lending against gold jewelry more restrictive.

Extensive lending  at 75% against gold typically marks the end of a major gold bull cycle.  The gold momo crowd contends that this time it is different.  RBI is obviously very serious about curbing speculation in gold.

Long-term investors should remain highly cautious against overweighting precious metals in portfolios.  It is a different story for short to medium-term traders.  Our long-term rating on gold and silver remains neutral with a negative bias; medium-term rating is neutral with a negative bias; and short-term rating is neutral.

From a very short-term perspective, the trade is to short on up spikes.  There is too much risk in going long from a very short-term perspective.