Home >Market >Stock-market-news >The new glitter in gold mining and lender stocks

Mumbai: Gold mining and jewellery stocks—often a proxy to bullion—have shone the brightest in 2016 after a dull three years with some of them doubling in value since 1 January.

The rally replicates a sharp price in the underlying commodity.

Gold prices are up close to 26% since 1 January, the best year-to-date performance in nearly three decades, as investors sought safe haven assets amid global political and economic uncertainty and made bullion the year’s most preferred investment.

Analysts said that gold mining and jewellery stocks offer a leverage play to gold prices and tend to amplify the strength in gold prices.

The boom in bullion has just begun after being stuck in a bear market for the past few years and mining stocks will once again become the kind of leveraged bet on gold that investors crave, said Ronald Peter Stoeferle, managing partner and fund manager at Incrementum AG, based in Liechtenstein.

Shares of Indian gold exploration and mining company Deccan Gold Mines Ltd (DGML) have nearly doubled from the start of this current year to close at 68.15 on Wednesday. The company on 29 June received an approval from the ministry of mines and is waiting to complete its licensing process for the Ganajur mine in Karnataka.

This is part of a worldwide trend. Shares of Canada-based Barrick Gold Corp., the world’s largest gold mining company, have gained 174.3% since 1 January on the Toronto Stock Exchange. US-based Newmont Mining Corp. has risen 130% on the New York Stock Exchange.

Similarly, gold-loan lending companies such as Manappuram Finance Ltd and Muthoot Finance Ltd have also benefitted from the rise in gold prices with the former’s shares gaining one-and-a-half times since 1 January.

To be sure, a change in norms such as the central bank allowing these firms to advance loans up to 75% of the value of gold pawned has also helped boost growth, said analysts.

Earlier, RBI had capped the loan-to-value ratio at 60% and this had hurt profitability at a time of falling gold prices.

Manappuram’s decision to “de-link its business from gold price fluctuations by reducing the tenure to 3-9 months from 12 months earlier" has also helped and it will “see steady growth ahead," said Rati J. Pandit, senior analyst at Quantum Securities Pvt Ltd.

Manappuram’s shares have risen 165% this calendar year while Muthoot’s stock is up nearly 60%.

Despite this sharp price rise, many analysts believe that stocks tied to gold, especially mining ones, are still undervalued and predict a continuation in their rally.

A look at previous bull markets shows that “the recent uptrend is still relatively small and short in duration compared to previous bull markets. Thus, if this is indeed the beginning of a significant uptrend in gold mining stocks—which we assume to be the case—there should still be a great deal of upside potential," Stoeferle said.

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