The recent surge in gold prices to record highs is creating a complex environment for jewellery firms. While rising prices can inflate revenues, analysts are warning investors that profit margins may be shrinking due to several factors.
Gold prices have been driven up by a combination of factors, including escalating trade tensions, a weakening US dollar, increased demand for safe-haven assets, and geopolitical uncertainty. As of April 11, 2025, gold reached a record high of $3,237.98 per ounce. Some financial institutions predict that gold could reach $3,000 per ounce by mid-2025.
Revenue Growth, but Challenges Remain
Organized gold jewellery retailers are expected to see revenue growth of 22-25% this fiscal year. This is partially attributed to a reduction in import duties, which led to lower retail gold prices and increased affordability for purchasers. The duty cut from 15% to 6% resulted in a price decline of Rs 4,500- Rs 5,000 per 10 gm in July 2024, boosting sales volumes.
However, the rise in gold prices also presents challenges. Demand for gold jewellery has softened as consumers shift towards lighter, lower-karat, and studded jewellery to manage costs. Some retailers are moving upmarket to cater to clients seeking exclusivity. Some jewellery companies have experimented with strategies to combat soaring prices, such as passing costs on to the consumer, offering alternative metals, gold-plating silver, and heavying up on precious gemstones to relegate gold to settings only.
Shrinking Margins and Inventory Losses
Despite revenue growth, operating profitability may moderate by 40-60 basis points to 7.1-7.2%. The sudden price decline could lead to inventory losses on existing stock, which may be partially mitigated by reduced spending on marketing and promotional campaigns due to improved demand.
Analyst Warnings and Investment Strategies
Analysts are advising caution, noting that physical demand for gold in jewellery is down, particularly in non-OECD countries, due to high prices. Gold is a very boom-or-bust commodity. While gold is often considered a safe haven, it has been behaving like a risk asset, moving in tandem with markets like Bitcoin and stocks. This means that if there is trouble in risk assets, gold could follow suit.
Impact on the Jewellery Market
The rising cost of gold is expected to have several impacts on the fine jewellery market. Brands are likely to focus on timeless, high-quality designs rather than disposable trends. Many designers are shifting core collections toward 14K gold for its balance of durability and gold content, while 18K and 22K gold become more exclusive.
Beneficiaries of Rising Gold Prices
While jewellery companies face challenges, gold-loan financiers are benefiting from the rising gold prices. Companies like Manappuram Finance and Muthoot Finance are seeing increased collateral value and loan disbursals. Higher gold rates directly lift collateral values, enabling larger ticket sizes and reducing default risks, which in turn boosts AUM growth.
Conclusion
The surge in gold prices presents a mixed bag for jewellery firms. While revenues may be inflated, profit margins are under pressure due to softening demand, inventory losses, and the need to adapt to changing consumer preferences. Investors should remain cautious and consider the various factors influencing the gold market before making investment decisions.
