Gold vs. Jewelry

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.

As price decreases, consumers will buy more of the good.

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.

[stockquote]GITANJALI[/stockquote] [stockquote]MUTHOOTFIN[/stockquote] [stockquote]MANAPPURAM[/stockquote] [stockquote]TITAN[/stockquote] [stockquote]GOLDBEES[/stockquote]


Today’s pick is MUTHOOTFIN [stockquote]MUTHOOTFIN[/stockquote]. The stock began 2012 with a small uptrend, which ended very quickly after seeing highs of Rs. 180. The downwards movement that followed lasted till September. The stock has since been on an up-trend and touched its 52-week high just yesterday. In the last three months, the stock has moved +26% vs. +5% of the Nifty’s.

MUTHOOTFIN Technical analysis chart

Oscillators RSI and CMO are closing towards the over-bought territory. The short-term technical flashed a 4×9 Bullish cross-over for the scrip.

The MACD line has just penetrated the signal line from below to give out a bullish signal. The long-term GMMA lines are experiencing expansion which suggests an upward movement to the stock for a longer term horizon.

MUTHOOTFIN correlation chart

MUTHOOTFIN’s average correlation with the Nifty is Zero. The scrip will be not be replicating the movement of Nifty. [stockquote]NIFTYBEES[/stockquote]

MUTHOOTFIN volatility chart

MUTHOOTFIN has a historical volatility in the range of 0.4 to 1.0. The scrip’s volatility currently is in the middle of the range.

Given these technicals, we suggest a short-term and a long-term BUY for the scrip. With trailing stop-losses in place traders can book profits if a trend-reversal were to take place.

Disclaimer: The analyst holds this stock in his portfolio.

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RBI pulls plug on gold loans


Loans (Photo credit: jferzoco)

As the saying goes, all good things must come to an end. Even in these difficult times, gold loan non-banking finance companies (NBFCs) saw roaring sales and record margins. According to ratings agency ICRA, “`Gold loan companies have reported an estimated compounded annual growth rate (CAGR) of over 100% during the last three years, with the portfolios of the top three companies cumulatively exceeding Rs. 410 billion as on Dec. 31, 2011.

Consider this- During the third quarter of the current fiscal, Manappuram Finance [stockquote]MANAPPURAM[/stockquote] more than doubled its net profit from a year ago to Rs. 161.37 crore, loan disbursements surged 86% while assets under management rose 90% to Rs. 12,358.21 crore. Industry leader Muthoot Finance [stockquote]MUTHOOTFIN[/stockquote] posted a 61% growth in net profit to Rs 251 crore, while total income galloped 91% to Rs 1,231crore and assets under management increased by Rs 1,944 crore to Rs 22,885crore.

clip_image001But the honeymoon is over. Fearing risks to banking system and retail investors due to the sharp surge in loan against gold, the Reserve Bank of India (RBI) tightened lending rules saying these companies can’t lend more than 60% of the value of gold jewelry. It also directed them to maintain a minimum tier-1 capital of 12% by April 2014 while depriving them of granting loans against bullion, primary gold and gold coins.

clip_image001[6]RBI’s moves are not without reason. The sharp surge in gold prices has resulted in an equally sharp increase in demand for gold loans, especially in rural areas. Since these NBFCs depend heavily on public funds like bank loans and non-convertible debentures, any reversal in gold prices will not only catch NBFCs off guard but may also pose a systemic threat, affecting banks and retail investors.

While the prudential norms has found favour with experts who believe it would improve the sector’s asset quality in the long-run and help them absorb any sharp volatility in gold prices, they maintain that the lower loan-to-value- (LTV) ratio will moderate disbursement volumes and result in business clip_image001[8]shifting to unorganized players like moneylenders who can still extend loans at higher LTV ratios.

Gold NBFCs, which are used to high profit margins, may have to reduce interest rates to prevent borrowers from shifting elsewhere, which will take the sheen out of their high flying business. Business growth is likely to fall from 80 per cent per annum to 20-25 per cent per annum and return on assets (RoA)may moderate from the current high level of 4.5 per cent to 2.5-3.0 per cent.