Jewellery stocks soared in Friday's trading as gold hit new record highs amid global central banks initiating interest rate cuts in response to easing inflation. The US Federal Reserve is also expected to lower its benchmark rates next week, further fueling the rise in gold prices.
Shares of Tribhovandas Bhimji Zaveri (TBZ), Kalyan Jewellers, Senco Gold, Motisons Jewellers, PC Jeweller, and Thangamayil Jewellery all experienced gains ranging from 4 percent to 18.5 percent.
For regional jewellery companies, increasing gold prices can be advantageous. These companies typically leave a larger portion of their gold inventory unhedged, allowing them to directly profit from any rise in gold prices through inventory gains.
In contrast, larger jewellery firms such as Titan and Kalyan Jewellers hedge from 70 percent to 90 percent of their gold. While these companies hedge a significant portion of their gold, the unhedged portion of their inventory also benefits from rising gold prices.
Overall, jewellery stocks have performed well recently, bolstered by several factors: reductions in customs duties on gold and silver announced in the recent Union Budget, rising demand for wedding jewellery, positive brokerage recommendations, and expectations of strong demand during the upcoming festive season.
Gold prices surged by 2 percent on Thursday after the European Central Bank (ECB) cut rates by 25 basis points, as anticipated. The ECB's decision reflects growing confidence among policymakers that inflation is easing. This marks the ECB's second rate cut, following the one in June.
Expectations of a rate cut by the US Federal Reserve have increased. Recent data, including higher initial jobless claims and weaker August payrolls, indicate a cooling labour market. Meanwhile, US producer prices rose slightly more than expected in August due to higher service costs, but overall trends show easing inflation.
US Federal Reserve Chair Jerome Powell recently supported the notion of imminent rate cuts, citing concerns about a weakening labour market.
Currently, markets foresee a 59 percent probability of a 25 basis point cut and a 41 percent chance of a 50 basis point reduction, according to the CME FedWatch tool.
Spot gold prices climbed an additional 0.5 percent today, reaching a new record high of $2,570 per ounce. Gold has outperformed all other asset classes in 2024, providing substantial returns while maintaining its physical appeal.
At the beginning of 2024, spot gold was trading at $2,062 per ounce. It has since risen 24.5 percent to $2,567 per ounce. The Nifty 50 has jumped 16 percent over the same period.
Even before central banks announced rate cuts, gold prices had already been rising. Several other factors drove gold prices to unprecedented heights this year, including substantial purchases by major central banks such as those in China and India, escalating geopolitical tensions, ongoing trade wars between global superpowers, and strong retail demand for gold.
Global central banks, particularly in Asia, have been actively diversifying their foreign exchange reserves away from the US dollar. China has led this trend by decreasing its holdings of US Treasury securities and significantly increasing its gold purchases.
Gold prices typically react positively to lower interest rates or the expectation of rate cuts by global banks because lower interest rates diminish the returns on interest-bearing assets like bonds and savings accounts. This makes gold, which does not yield interest or dividends, more appealing because the opportunity cost of holding gold decreases.
Lower interest rates can also signal or contribute to higher inflation, prompting investors to turn to gold as a hedge. Gold is traditionally viewed as a store of value that helps preserve purchasing power.
Moreover, interest rate cuts often weaken a country’s currency, reducing its value relative to other currencies. Gold becomes cheaper for investors holding other currencies when the US dollar weakens, boosting demand.
As interest rates fall, investors may seek assets with higher potential returns, like gold, leading to increased investment demand and rising gold prices.
Furthermore, central bank rate cuts often signal a more accommodative monetary policy, improving investor sentiment and increasing the buying of gold, which is considered a safe haven during uncertain economic times.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before making any investment decisions.
