Gold trades near ₹71,500: These stocks are in focus as gold touches record high

Gold prices touched a new lifetime high of ₹71,425 per 10 gram on MCX today. In the last few weeks, gold prices are on the run, making new highs in the global and Indian markets. The price of yellow metal, which is generally considered a safe haven investment during market turbulence, trades above $2,350 in the US market.

Gold prices are on the rise because of multiple factors, including a fall in the US dollar index and rising expectation of a rate cut by the US Federal Reserve. As a result, since early March 2024, the gold prices have gained over 13% from ₹62,567 per 10 gram (as on 1 March 2024) to a current trading level of ₹71,380 per 10 gram.

What are the key factors behind record gains in gold prices?

Decline in the US dollar index

In recent months, the US dollar index has seen a consistent decline and has even touched a low of 102.3 against a basket of foreign currencies. This has supported the rally in gold prices. But how?

In the global markets, gold is denominated in the US dollar. Meanwhile, gold prices are inversely correlated to the US dollar. Hence, a weaker dollar makes gold more attractive for holders of other currencies, leading to increased demand, which pushes the prices higher.

US Fed interest rate cut expectation

Experts believe expectation of the US Fed’s rate cut has significantly impacted the performance of bullion. When interest rates are higher, the opportunity cost of holding gold (which doesn't yield interest or dividends) is also high, which reduces the attractiveness of gold as an investment because other interest-bearing assets like bonds and savings accounts give better returns.

But when interest rates are low or expected to get lower, the opportunity cost of holding gold decreases, making it relatively more attractive compared to interest-bearing assets, leading to a potential boost in demand for gold.

Besides this, other factors like escalating geopolitical crises in the Middle East and Ukraine, sustained gold buying by the central banks and global economic uncertainty also increase gold demand and spike the price of precious metal.

Amid a surge in gold prices, investors must be exploring opportunities to benefit from this upward trend. Here are key stocks likely to get impacted when gold prices are on the rise.

Gold loan financing companies are on the rise

Surge in gold prices is likely to benefit the gold loan financing companies like Muthoot Finance, Manappuram Finance. A spike in gold prices lifts the value of the collateral held by these companies. Besides this, increase in gold prices leads to higher loan values for borrowers, which triggers consumers to borrow more, eventually benefiting the gold loan financing companies.

Gold price rise is already reflected in stock returns. Muthoot Finance and Manappuram Finance shares have gained more than 13% respectively so far in April month.

Jewellery retailers to face double blow

Higher gold prices adversely impact jewellery retailers. In fact it's a double blow for the industry. Firstly, sustained increase in gold prices reduces the purchasing power for consumers, which directly impacts the jewellery demand and sales volumes. Secondly, rise in gold prices leads to increased cost of production for jewellers, affecting their profit margins.

As a result, shares of listed jewellery retailers are under pressure, with Titan, Kalyan Jewellers, PC Jeweller down up to 2.7% so far this month.

Conclusion

Gold prices are influenced by multiple factors as mentioned above. Hence, prices can get volatile in the short term with changes in any of these factors. Therefore, investors should do proper due diligence before investing in gold, especially on a short term basis.