TBZ, Motisons Jewellers, and 4 other jewellry stocks surge up to 18.5% amid record gold prices

Jewellry stocks soared in Friday’s trading as gold reached new record highs amid global central banks initiating interest rate cuts in response to easing inflation, with the U.S. Federal Reserve also anticipated 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 respectively.

How rising gold prices benefit jewellry companies

For regional Jewellry companies, the increase in gold prices can be advantageous. These companies typically have a larger portion of their gold inventory unhedged, meaning they benefit directly from any rise in gold prices through inventory gains.

In contrast, larger Jewellry firms such as Titan and Kalyan Jewellers hedge a significant portion of their gold, ranging from 70 percent to 90 percent. While these companies do have some of their gold price hedged, the unhedged portion of their inventory also benefits from rising gold prices.

Overall, Jewellry stocks have performed well recently, bolstered by several factors: reductions in customs duties on gold and silver announced in the recent Union Budget, increased demand for wedding jewellry, positive brokerage recommendations, and anticipated strong demand during the upcoming festive season.

Gold touches fresh all time highs 

Gold prices surged by 2 percent on Thursday following the European Central Bank’s decision to cut rates by 25 basis points, as anticipated. This move reflects increasing confidence among policymakers that inflation is on a steady decline. This marks the ECB’s second rate cut after June.

Additionally, expectations for a rate cut by the US Federal Reserve have increased. Recent data, including a rise in initial jobless claims and weaker August payrolls, suggest a cooling labor market. Meanwhile, US producer prices increased slightly more than expected in August due to higher service costs, but the overall trend continues to indicate easing inflation.

Chair of the Federal Reserve of the United States, Jerome Powell, recently supported the notion of imminent rate reductions due to 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.

Building on the previous day’s gains, spot gold prices climbed an additional 0.5 percent today, reaching a new record high of $2,570 per ounce. In the current calendar year so far, gold has outperformed all other asset classes, not only retaining its physical allure but also providing substantial returns.

At the beginning of 2024, spot gold was trading at $2,062 per ounce, and it is now priced at $2,567 per ounce, representing a rise of 24.5 percent. In the same period, the Nifty 50 has jumped 16 percent.

Even before central banks announced rate cuts, gold prices were already on the rise. Several other factors have driven gold to unprecedented heights this year, including substantial purchases by major central banks like those in China and India, escalating geopolitical tensions, ongoing trade wars between global superpowers, and strong retail demand for gold.

Central banks around the world, particularly in Asia, are actively diversifying their foreign exchange reserves away from the U.S. dollar. China has been leading this trend by decreasing its holdings of U.S. Treasury securities and significantly increasing its gold purchases.

Lower interest rates make gold more attractive

Gold prices react positively to a drop in interest rates, or an expected rate cut by global banks because lower interest rates diminish the returns on interest-bearing assets like bonds and savings accounts, making gold—which does not yield interest or dividends—more appealing. This occurs because the opportunity cost of holding gold decreases.

Additionally, lower interest rates can 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 can weaken a country’s currency, reducing its value relative to other currencies. As gold is priced in U.S. dollars, a weaker dollar makes gold cheaper for investors holding other currencies, thus boosting demand.

Lower interest rates can also drive investors to seek assets with higher potential returns, including gold, leading to increased investment demand and rising gold prices. Furthermore, when central banks implement rate cuts, it often signals a more accommodative monetary policy, which can enhance investor sentiment and lead to increased buying of gold, 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.