Today’s collapse in Gold took down gold jewelers like Titan (-5.05%), Gitanjali (-2.98%) along with gold lenders like Muthoot (-12.71%) and Manappuram (-9.84%). I understand why gold loan companies might be in trouble if the downtrend continues. The biggest question being whether their customers can top up their LTV given that the collateral is down -13.81% this year? However, unless the jewelry guys got into some nasty hedging bets, isn’t falling gold prices a net positive to them?
Women secretly know that gold jewelry is a bad investment. Trinkets falls 30% in value the minute you take it out of the showroom. The investment angle was something that they use to make men feel better about blowing away money. The drop in gold prices actually makes it more affordable so I would expect foot traffic to retail jewelers would actually increase.
There are significant headwinds affecting gold. Chief among them the ECB’s pressurization of Cyprus’ central bank to sell its gold reserves to help pay for the country’s bailout. That has raised expectations that other distressed euro-zone members might be forced to sell gold as well. Other factors include bearish forecasts such as from Goldman Sachs, the slow improvement in the U.S. economy, and the perception that gold is no longer needed as a safe haven.
However, if you are with me on the thesis that, in reality, jewelry buyers are not buying gold for investment but for consumption, then the drop in gold prices are a net positive to jewelry companies.
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[stockquote]GITANJALI[/stockquote] [stockquote]MUTHOOTFIN[/stockquote] [stockquote]MANAPPURAM[/stockquote] [stockquote]TITAN[/stockquote] [stockquote]GOLDBEES[/stockquote]