Boom for gold, gloom for gold companies

February 03, 2009

By Rishabh Vora, Commodity Online
MUMBAI: The skyrocketing gold prices have shrunk the gold imports in India. The demand for jewellery was sluggish in November and December but has simply vanished in January. However, the demand for investment purpose has gained momentum as the prices have shot up to its all time high.

Gold prices opened low in the morning trades on Tuesday at Rs.14098 per 10 gms and USD 902 per ounce in the international markets.

But the increasing prices of the yellow metal has not brought in any benefit to companies engaged in the jewellery making and trading like Gitanjali Gems Ltd and Rajesh Exports Ltd. On the contrary the stock prices of these companies fell by nearly 2% from their previous close on the anticipation of adverse impact on their businesses with increasing gold prices.

Gitanjali Gems, a leader in jewellery exports reported a fall in its consolidated net profits by 42% to Rs.291.52 million in the company’s Q3 results for the FY’09 declared recently. The fall in the profits were the fallout of the contraction in the diamond and jewellery segments of the company during the period.

The company witnessed a decline of 17% in its revenue from India operations and a 7.8% decline in its overseas operations during the quarter. In the early trades on the Bombay Stock Exchange (BSE), Gitanjali Gems was trading at Rs.47.55 down by 3.6% while Rajesh Exports Ltd was trading at Rs. 24.75 down by nearly 2%.

According to experts, the low demand for gold is mainly driven by people who are cashing in by selling their inventory, which has led the jewellary demand to its lowest while the investment demand has increased considerably. Analysts believe that the volatile investment demand derived from the lure for gold exchange traded funds would drive the Indian gold prices to see a high of Rs.16000 per 10gms in coming months.

According to Forward Markets Commission (FMC) data, the bullion contracts contributed as much as Rs.2,023,441 crore to the total turnover of India’s commodity exchanges during first none months of the current fiscal. However, on the basis of historical trend in gold prices, it is less likely to make an extraordinary rise.

And as the prices increase, demand only subsides and in a country where most of the gold is retailed in the form of jewellery, lower sales have impacted the companies engaged in this business more than the mining companies engaged in gold mining.

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