US President Donald Trump’s tariff plan on various countries has started impacting the jewellery market in India. Jewellers in India are facing a significant challenge due to the high cost of leasing gold in the near term. The ongoing tariff uncertainty has prompted global banks to accumulate and secure the yellow metal, leading to a potential supply crunch in India, one of the top consumers.
Let’s understand the reasons behind the increase in gold leasing rates and how they are impacting Indian companies operating in the jewellery sector.
What’s Happening?
In India, jewellers are facing a substantial challenge due to the high cost of leasing gold. The rate for leasing gold has risen from 2%-3% earlier to about 6%-7% in just one month, as mentioned in Financial Express. This increase in cost not only raises expenses but is also likely to impact the companies’ profit margins.
Rates in the global market have surged due to tightening global supply. Mirroring the same trend, gold leasing rates in India have doubled in a month. Some analysts expect the rates to increase further in the future amid supply and tariff concerns. In India, vaults storing gold are nearly empty, as banks have moved the yellow metal to the US, where it is fetching a premium, instead of returning it to India, as physical gold prices are trading at a discount compared to gold futures.
Why Are Gold Prices Rising?
In 2024, the yellow metal delivered an impressive return of around 27%. Looking at the year-to-date performance, gold has delivered a further rally of around 12.08% as of February 20, 2025. The possible reasons for the increase in gold prices are:
Geopolitical Uncertainty: Concerns over US President Donald Trump potentially withdrawing support for Ukraine in the Russia-Ukraine war.
Trade Tensions: Trump’s threats of reciprocal tariffs on global trade, including India.
Federal Reserve Policy: Investors are analysing Fed minutes, which highlight a cautious stance on interest rates.
Continuous Buying by Central Banks: Amid uncertainty and Trump’s re-entry, central banks have started accumulating gold in their reserves.
Inflation Concerns: Trump’s tariff threats and the resulting trade war escalation have heightened inflation concerns, leading to growing demand for gold.
COMEX Gold Inventories
The piling up of gold stock in New York has surged, with inventories at the CME Group’s COMEX nearly doubling from 17.5 million troy ounces in November to 33.38 million troy ounces in early February. This recent shift indicates caution among financial institutions as they seek to mitigate potential trade-related risks.
COMEX gold inventories have shown a significant U-turn and are approaching the previous peak registered during the COVID-19 pandemic.
What Does This Mean for Investors?
The increase in the cost of leasing gold from banks is likely to impact the margins of organised players in India, such as Titan, Kalyan Jewellers, and PN Gadgil, among others. Some analysts and companies even expect a further increase in rates.
As a result, during the December quarter, companies reported dismal earnings and expect that these rising rates may persist in the upcoming quarters, further impacting their earnings. This could negatively affect share prices until the rates normalise.
Furthermore, the festive and wedding season ended in the December quarter, and there are no significant factors to drive the sales of these companies in terms of consumption.
What’s Next?
The reciprocal tariff announced by Trump could trigger a trade war on a global scale. Following this, the demand for safe-haven assets like gold has increased significantly. His plans to introduce tariffs on lumber, automobiles, semiconductors, and pharmaceuticals within the next month further add to uncertainty and market volatility. Recently, he has implemented a 10% tariff on Chinese imports and a 25% tariff on steel and aluminum.
Additionally, the surge in gold leasing prices may impact the earnings of jewellery companies in India for the upcoming quarter. Any further increase could significantly affect both earnings and stock prices.
*The companies mentioned in the article are for information purposes only. This is not an investment advice.
*Disclaimer: Teji Mandi Disclaimer
