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If India were to announce its national metal, what would it be according to you?

It had to be gold, don’t you think?

Nearly 75% of Indian households own gold in some form. Such has been the popularity of the precious yellow metal amongst Indians.

Ownership of gold gives a sense of financial security. It symbolizes success and also functions as a means to show off. Gold can also be used as collateral for obtaining loans.

Ironically, India doesn’t produce enough gold to satisfy domestic demand. According to the World Gold Council, gold imports make up 86% of gold supply in India while recycling has a 13% share. Gold mining has a tiny contribution of 1%.

And this is a sensitive topic, especially when the Indian Rupee (INR) is under pressure. In FY22, India imported gold worth USD 46 billion which was 33% higher as compared to that in FY21. Gold imports account for 7%-8% of total imports.

To ensure currency movements don’t hamper the imports of essentials, such as crude oil, the government discourages gold imports when the INR is trending downwards.

Recently, the government hiked the basic import duty on gold from 7.5% to 12.5% which will make gold expensive in India almost by a corresponding value.

Do higher gold prices negatively affect gold consumption? And do they have any impact on jewellery stocks and gold loan companies?

Let’s find out.

India Gold Policy Center (IGPC) presented a paper India Gold Track in April 2022. It was based on a pan-India survey of 40,427 households covering rural and urban clusters.

Here’re some crucial findings of IGPC:

  • Middle income groups, i.e. those with an income level of Rs 2 lakh to 10 lakh p.a. have a 56% share in India’s total gold consumption volume
  • 65%-70% of jewellery demand is on account of marriages and festivals
  • In value terms, urban households have a 70% share in gold consumption
  • Advertisement and pricing play a small role in gold purchase decisions and only lower income groups are influenced by these factors
  • Brand name, in-store and peer experience are the most crucial deciding factors guiding gold purchases
  • Pure gold jewellery is popular amongst middle income groups while studded gold jewellery is popular amongst higher income groups

Interestingly, an IGPC paper implied that gold imports need not be treated as imports of a demerit good. In economics, a demerit good is one whose consumption could turn unhealthy, if it goes unchecked.

Gold is traded universally and priced in USD. Hence, it offers investors a hedge against any potential erosion in their rupee-denominated assets such as stocks and real estate, amongst others, due to currency movements.

So who benefits the most in the value chain—a hoarder of gold, a jeweller or a gold financing company?

We decided to find out. Besides tracking gold prices, we used the stock price performance of Titan Company and Muthoot Finance as proxies to measure the impact.

Over the last 11 years, the stock price of Titan Company ascended at a 22% Compounded Annualized Growth Rate (CAGR), while that of Muthoot Finance rose 18% on a compounded annualized basis. Gold generated a moderate return of 8% CAGR.

Needless to say, the past performance may or may not get repeated in future and the same set of companies may or may not benefit. It’s noteworthy that a few companies from the same sector, such as PC Jeweller and Gitanjali Gems, have been wealth destroyers over the last 10-11 years.

To sum up

  1. Gold prices and duties thereon imposed by the government aren’t major drivers of gold consumption in India
  2. Gold’s cultural significance in India is deep-rooted
  3. If you are investing in a gold jewellery stock, you should track two trends meticulously—festive and marriage season demand and the ability of the company to enhance customer experience besides its brand value
  4. Falling gold prices negatively affect the value of collateral in the case of gold financing companies
  5. And here’s the most important one: there’s no substitute to prudent stock selection

So, what are you betting on: gold or jewellery stocks or gold finance companies? Do leave your response in comments.

You may also like to read: Airports in India: ready for take-off?

 

Disclaimer:

The blog is for information purposes only and anything mentioned herein shouldn’t be construed as a fundamental reason to buy/hold/sell any stock. Furthermore, the information provided in the blog and observations made therefrom shouldn’t be treated as the extension of recommendations made on the other properties of Ventura Securities. If you follow any research recommendations made by our fundamental or technical experts, you should also read associated risk factors and disclaimers.

We strongly suggest you to consult your financial advisor before taking any decision pertaining to your finances. Asset allocation becomes extremely relevant.

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

 We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company.

We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

 

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