The start of July 2019, has resulted in a reversal in the trend of gold prices, which in the last week of June had soared to an all-time high. For Indian citizens, there was an immediate dampening of demand and the upcoming festivals looked set for a dull display. But that has all passed and teh proof lies in the fact that buying in safe haven entities has now cooled off. This is also because, investors fear moving away from China-US trade war. Gold prices, after shooting up to Rs 35,000-levels in major cities have weakened. On Tuesday, a 10 gram of gold in 22 karat was priced at Rs 32,700 down by Rs 500 in Mumbai, followed by Rs 32,850 below Rs 350 in Delhi, Rs 32,140 lower by Rs 380 in Chennai, however price remaining unchanged at Rs 33,020 in Kolkata. 

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Similarly, a 10 gram of gold in 24 karat was available at Rs 33,700 down by Rs 500 leaving the over Rs 34,000-mark in Mumbai. While, the price of this gold began at Rs 34,050 down by Rs 350 in Delhi, and Rs 35,090 below Rs 380 in Chennai. Just like 22 karat, 10 gram in 24 karat price remained muted at Rs 34,220 in Kolkata compared to previous day. 

Even, global gold price have left the 6-year high mark $1,400 an ounce on Monday, as investors turned positive over trade relations between the United States and China. 

According to a Barrons.com report, investors had sought safety in gold in the past few weeks partly because of concerns about further escalations in the U.S.-China trade war. But at the Group of 20 summit meeting in Osaka, President Donald Trump and Chinese President Xi Jinping agreed not to increase tariffs while the two leaders resume negotiations on a possible deal.

The last week of  June 2019 was a major driver for gold prices with geopolitical tension getting critical between US and Iraq. Further, US-China trade deal continued  to have its own impact. However, the major booster for safe haven assets like gold was central banks like the US Federal Reserves and European Central Bank giving a dovish stance with rate cut hopes ahead. Additionally, Brexit and weakening of dollar also added fuel to the shining of yellow metal. Global cues led to higher Indian gold price. 

Not only that, Indian gold price was seen to move higher towards 35500 while taking support near 33800 while silver can test 40000 while taking support near 37800, as per SMC’s note. 

Expert at JM Financial in their research note highlighted that,  net gold imports and current account deficit have moved in tandem in the past though since 3QFY18, gold imports have remained stagnant even as CAD increased, mainly because the imports of crude and electronic goods in FY19 have increased by 30% (YoY) and 8% (YoY) respectively. In our view, given the benign outlook on oil, the increase in gold prices is unlikely to damage the CAD.

But did you know two stocks namely Titan Company and Muthoot Finance are sensitive to any movement in gold prices. However, interestingly, these companies are seen  to surpass the soaring gold price even if the case still remains open in nearterm. While, they still majorly benefit from cooling of gold price, as demand would once again rise especially driving revenue in festival season. 

Here’s Titan and Muthoot are well placed jewelers on Dalal Street, as per JM Financial note. 

Titan Company:

Titan’s making charges are now linked to the underlying value of the jewellery pieces and there is no material impact on margin % in either a rising or falling gold price scenario. From a jewellery demand perspective, consumers typically work with an INR budget and these are rarely based on grammages; as a result, higher gold prices would mostly be offset by lower grammage purchased and vice-versa, though in the initial stages of a highly price-inflationary phase, consumers may adopt a wait-and-watch approach. 

This is also evident in FY17 and FY18 results – average gold prices were 12% higher in FY17 but dropped by 1% in FY18 while Titan’s jewellery segment posted 20%+ revenue growth coupled with operating margin expansion in both years.

Muthoot Finance: 

Recent rise in gold prices enables credit traction of ~8% from existing customers, by providing them top-up loans. During FY13 to FY 16, gold prices had declined ~8-9%, in this period the firm’s LTV increased by ~400bps to 68% levels, and post FY16 till FY19, the gold prices increased by ~10% and the firm’s LTV was 62%. In the recent spike in gold prices, LTVs have reduced to 57% levels from 62% as on 31st March’2019. 

So, if the company wants to maintain a moderate LTV level of ~62%, then it can grant around top-up loans which alone could result in a ~8.3%YoY growth in FY20. The asset quality will strengthen further. The gold finance companies by maintaining an average LTV of 62-65% (despite maximum limit of 75%) have been able to lower the risk of sharp decline in gold prices. The recent surge in gold prices will further reduce the risk of defaults by existing customers.

Hence, these two companies are multibaggers on stock exchanges as well. One can even take them as a safe haven asset to avoid risk of volatility on benchmark indices Sensex and Nifty.