Manappuram, Muthoot Finance surge up to 5% as spot gold prices hit a record high

Shares of Manappuram Finance gained over 3%, while those of Muthoot Finance gained as much as 5% on Thursday, after spot gold prices hit an all-time high of ₹2,220 per ounce.

Spot Gold prices are up 3% this week and are up 10% over the last month.

Gold prices rose after the US Federal Reserve maintained its easing stance of three rate cuts in 2024. Traders are now pricing in a 73% chance of a rate cut from the Fed in June.

Additionally, safe haven demand and geopolitical situation globally is also adding to support for prices. Central Bank's of China, Poland, Singapore, and Libya are top buyers of the yellow metal.

Strong gold retail buying is also seen in China and Turkey.

Brokerages like JPMorgan expect Gold prices to rally towards levels of $2,500 by the end of 2024. While UBS sees levels of ₹2,250, Citi is expecting levels of ₹2,300.

Gold financiers like Muthoot Finance and Manappuram Finance are institutions that specialise in providing loans against gold.

Muthoot Finance's Gold Loan AUM increased by 22% year-on-year in the December quarter to ₹12,397 crore.

With the increase in gold prices, people tend to pledge more gold as collateral for loans. This means that the ticket size of loans increases, leading to loan growth for gold financiers. The incremental ticket size is beneficial for both the borrower and the lender. The borrower can get more money by pledging the same amount of gold, while the lender can increase the loan portfolio.

The co-relation between gold prices and the balance sheet growth of gold financiers is historically high. This means that when gold prices rise, the balance sheet of gold financiers also grows. This is because an increase in gold prices leads to more people pledging gold as collateral for loans, which in turn leads to more loan growth for gold financiers.

Shares of Manappuram Finance are trading 3% higher at ₹171.5. The stock has gained in five out of the last six trading sessions. Muthoot Finance stock is up 4.6% at ₹1,400. The stock is up for the second day in a row.