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