April 27, 2024: Since the beginning of 2024, gold prices in world over have seen a notable increase, driven largely by a weak U.S. dollar and expectations that Fed will begin lowering rates. Fed interest rate cuts and falling U.S. real yields will once again become the key drivers behind gold prices in 2024.
Gold Price Trends from January to April 2024:
The average price for 24-karat gold in April 2024 stands at roughly INR 71,414 per 10 grams, indicating a substantial increase from the 2023 average price of INR 63,203.
Catalysts for the Price Surge:
Several factors have contributed to the uptick in gold prices:
- Geopolitical Instability: Heightened conflicts in the Middle East have driven investors towards gold, considering it a secure asset.
- Projected Interest Rate Reductions: The expectation of lower interest rates in the U.S. enhances the appeal of gold, which doesn’t yield interest.
- Ongoing Inflation: With inflation persisting, gold is sought after as a dependable value preserver.
Market analysts foresee this upward movement persisting, propelled by the forecasted cut in the U.S. Federal Reserve’s interest rates come June 2024. Typically, higher U.S. interest rates lead to a dip in gold prices as alternative investments, like bonds, become more lucrative, thereby strengthening the dollar and rendering gold pricier in other currencies. Nonetheless, the expected rate reduction is likely to bolster gold prices.
How to play the GOLD rally?
Gold continues to be a steadfast asset amid the fluctuating landscape of financial markets. The latest uptick in gold prices is transforming the mechanics of gold-backed loans, prompting financial institutions to reassess the value of collateral and borrowers to reconsider their repayment plans or the holding of their loans.
When gold prices rise, it typically benefits gold loan companies in several ways:
- Higher Loan-to-Value Ratios: Lenders might provide more substantial loans against the same amount of gold, leading to increased LTV ratios.
- Increased Demand for Gold Loans: More individuals are using their gold jewelry as collateral to secure funds.
- Secured Loans: Gold loans offer security to lenders since they are backed by gold.
- Accessibility for Borrowers: Borrowers have the advantage of quick cash access without needing a credit score or income verification.
- Lender’s Financial Security: Lenders have a safety net to recover excess amounts if the total outstanding loan surpasses the LTV limit during a price drop, making gold loans relatively safer.
In essence, the surge in gold prices enhances the collateral’s value, enabling gold loan companies to offer larger loans and attract more customers seeking to capitalize on their gold assets. This trend could lead to expansion in the gold loan market. However, a decline in gold prices could have the reverse effect, increasing the likelihood of loan defaults.
So, within Gold Loan companies block, we are recommending Muthoot Finance, a major player in the gold loan industry. It typically provides short-term bridge loans against gold jewelry, coins and bars, with an average period of around four months.
The company has a conservative loan-to-value (LTV) ratio, which means it lends a percentage of the gold’s value. A regulatory ceiling of 75% LTV provides a buffer against sharp falls in gold prices.
Technically, the stock looks ready for a good swing till INR 2,000 from the current level.
Current Price as of April 27, 2024: INR 1,690
Stop loss can be kept as INR 1,560.
Other GOLD Proxy Options:
- Gold Jewelry
- Gold Coins and Bars
- Gold Exchange Traded Funds
- Gold Bonds
