Senco’s Profit Drop: A Lesson in Gold Market Mechanics

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I used to think that because the gold prices are soaring high, Gold companies must be minting tons in profits. But after the lower circuit on Senco Gold yesterday, triggered by a 69% profit drop intrigued me to dig deeper.


Here’s the twist: These companies don’t actually buy gold!


The Supply Chain:


- International Bullion Banks → Indian Banks

Global bullion banks hold and supply gold to Indian banks on a consignment basis - Indian banks pay a lease cost instead of upfront payments.

Lately, a gold supply crunch (as banks moved gold to the U.S.) has increased global lease rates.


- Indian Banks → Jewellers (Gold Metal Loans - GML)

Indian banks import gold and lease it to jewellers instead of selling it directly.

Jewellers don’t buy gold outright—they take a Gold Metal Loan (GML) and pay interest (lease cost) instead.

📌 Example: 50% of Senco’s gold comes from GML, 29% from old jewellery exchange—gold price changes barely impact them!


(What are Gold Metal Loans?

A Gold Metal Loan (GML) allows jewellers to borrow GOLD from banks instead of buying it upfront. They pay only lease interest during the loan tenure and repay either in gold or cash based on the market price at maturity.)


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The Interesting part - Recent Developments in Leasing costs:


1. Record high rates - In recent weeks, GML leasing rates in India have more than doubled, reaching record highs. Traditionally ranging between 1.5% to 3%, these rates have surged due to a significant supply crunch. 


2.U.S. Demand Drain - Global bullion banks are redirecting gold reserves to the United States to sell on higher premiums in U.S. gold futures markets. This shift has tightened gold availability in other regions, including India, leading to increased leasing costs for local jewellers. 


Bullion-supplying banks have not been bringing gold into India in recent weeks since the market is in discount, while deliveries on COMEX fetch premium, a Mumbai-based dealer with a bullion importing bank said.


Vaults in key Indian cities storing gold imported by bullion banks are nearly empty, as banks have moved gold to the United States and are not interested in bringing it to India given the discounts, said another Mumbai-based dealer with a bank.


The premium on COMEX futures over spot prices widened again to about $28 per ounce on Monday, compared with discounts as high as $24 in India.


3. As a result, production expenses for jewellers like Titan, Kalyan Jewellers, Senco and Tribhovandas Bhimji Zaveri etc. have risen, potentially squeezing their profit margins.


"Jewellers were caught off-guard by the leasing rate shooting up to a record high," said Amit Modak, chief executive of PN Gadgil and Sons, a jeweller based in the western city of Pune. "Now they're clueless about how to handle it."  

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