Unlock the equity behind your gold

Emirates Money, the consumer finance subsidiary of Emirates NBD, allows customers to borrow against the value of their gold.

Even those sitting on a pile of gold need cash every once in a while.

That was the thinking behind a new product from Emirates Money that allows customers to borrow against the value of their gold.

It is the first such scheme in the Gulf, according to company officials, but similar to popular financing programmes in India and elsewhere in South Asia.

"The idea basically was these loans are very common in the subcontinent," says Vikas Thapar, the general manager of Emirates Money. "If you look at the UAE market, a lot of people hold a lot of gold, but the credit accessibility over the past few years has been slightly limited, as we all know."

The offering marks yet another step in the development of gold as a versatile financial instrument.

Emirates Money is a consumer finance subsidiary of Emirates NBD, the country's largest bank by assets. The company is offering loans of up to 80 per cent of the value of a consumer's gold, based on the spot price the day it is evaluated. A customer can submit gold bars, jewellery or bullion, but Emirates Money will only accept pieces that are 18 carats or more. The bank also notes that the gold deposits are insured and all transactions are recorded on camera. A customer must deposit at least Dh25,000, up to a maximum of Dh2 million, for a loan term of between six and 36 months.

Mr Thapar says he believes that the attraction for customers will be the potential to pay lower interest rates compared with other potential financing options.

He says most banks are offering salary transfer loans of between 11 per cent and 13 per cent annually, while self-employed individuals or those without positions at established companies pay between 16 per cent and 22 per cent.

"In this loan we are charging much less, 8 or 9 per cent," he says. "That allows customers to release the value of their gold without paying exorbitant rates on consumer loans." Emirates Money also charges a 1 per cent fee for processing the loan and calculating the value of the gold. The gold is stored in a vault at the Dubai Multi Commodities Centre Authority (DMCCA) and returned to the customer intact after the loan is repaid.

The price of gold has tripled in recent years, creating large stores of wealth in communities that use the precious metal as a traditional savings vehicle. It topped US$1,400 (Dh5,142) per troy ounce this month, up from less than $400 as recently as 2003.

In India, which is believed to hold 10 per cent of the world's gold, loans against gold are booming.

Many banks offer them, as well as specialised firms such as Muthoot and Manapurram, which claim to process gold loans within minutes. Emirates Money says it prices deposits within three to five days because it does not value the gold, but relies on the DMCCA to do so.

According to a recent survey by ICRA Management Consulting Services, India's gold loan industry grew 72 per cent in the past year.

The UAE boasts a large South Asian population, and gold is also a popular investment among GCC nationals and Arab expatriates, which makes Mr Thapar confident that the new offering will be well-received. "This is our first exposure [of this product] and we have already had 30 or 40 inquiries," Mr Thapar says.

While some gold enthusiasts will no doubt want to hang onto their stash for the long term, some advisers suggest investors may want to consider selling at least a portion of their holdings if they need cash rather than borrow against them.

"If there was ever a time to start selling out a little bit, this would be it. It has had a great run. It may make sense to lock in some profits," says Vince Truong, an adviser with Holborn Assets in Dubai.

To some extent, the introduction of gold loans is yet another indication of the metal's growing importance within the financial community. Less than a decade ago, the mining companies that funded the World Gold Council were thinking of shuttering the organisation, according to an article in The Wall Street Journal this week. The price was low and there were few buyers to help absorb a growing supply glut. To better market gold as an investment and make it more accessible to investors who were put off by the hassle of holding physical gold, the council created an exchange-traded fund under the symbol GLD. It is now the fastest-growing investment fund in history, according to the research firm Lipper, popular among everyone from hedge funds to individual investors.

The fund holds the equivalent of six months of the world's gold-mining production. Even one of the men who helped to create the GLD fund says the massive rally in gold prices will not last forever.

"We don't believe gold is always going to go up," he told The Wall Street Journal. "No investment does."