During the first Covid wave, the country witnessed heightened gold loans to tide over the cash crunch. But this time round, during the second wave, there has been a change of tack — outright sale of gold.

The warning signs are grim, and the government should not behave ostrich-like. Heightened gold loans may not only signify distress but also confidence that the economy would generate sufficient income to pay them off.

However, heightened gold sale signify both distress and lack of confidence that there would be enough income to pay off the loan. This is ominous.

Gross scrap supplies, which include old gold melted to make new designs, may exceed 215 tonnes and surge to the highest in nine years if a new wave emerges, says Chirag Sheth, a consultant at London-based Metals Focus Ltd.

In an initial sign of stress among consumers, Manappuram Finance, one of the nation’s biggest gold loan providers, auctioned Rs 4.04 billion ($54 million) of gold in the three months through March from loans that turned sour following a sharp drop in prices.

That compares with just 80 million rupees auctioned in the prior nine-month period. The jewellery was sold as Manappuram’s borrowers — typically daily wage earners, small time entrepreneurs, and farmers — couldn’t afford to repay the money.

In southern India, the country’s biggest per capita consumer, about 25 per cent more of old gold than usual has been sold to jewellers, according to James Jose, managing director of Kochi-based refiner CGR Metalloys.

These are gloomy straws in the wind. The third wave whose arrival is awaited with trepidation can only stoke this tendency further.

Selling family silver, so to speak, is never a happy decision especially for the rural folks to whom the only safe investment known is the yellow metal. They lie in dingy lofts fearing not the taxman as is the case with city slickers but the local dacoits and thieves.

They are the safe haven assets for them, the rain check. Now they are tumbling out and being lapped up by the covetous local goldsmith, who often doubles up as pawn broker, and gold loan companies.

It may curiously have the effect of achieving the elusive government objective of staunching the outflow of foreign exchange mainly to Switzerland for import of gold what with internal gold recirculation filling the near 100 per cent domestic supply gap.

In that sense, it might have achieved what gold monetisation scheme (GMS) could not. Under GMS one’s gold when deposited with SBI begets a small interest but at a huge price — the gold jewellery would be melted — that is a strict no-no with Indian women. It is a sad denouement that households which have been loath to melt their gold are being driven to selling them to make ends meet.

What the government needs to do is to unfurl a safety net as quickly as possible by pitch forking the ubiquitous SBI as bulwark against exploitation by covetous local money lenders, goldsmiths and sahus who dot our rural landscape and who all salivate at the prospect of shortchanging the gullible.

If the London metal exchange price governs the Indian price for purchases, it should govern the sale price also. But Indian financial market is known for its yawning gap between the bid and ask price so much so that, whether it is foreign currency market or bullion, the spread (difference between buy and sell price) is yawning.

Only a government agency (read SBI) can stand between rural folks and exploitation. SBI has the wherewithal and capacity to buy now and sell later at a more propitious time. We should not leave our gullible rural folks to the wolves.

It is not as if the urban folks will be impervious to exploitation. They too would welcome sale to SBI rather than to a local moneybag.