End of the gold rush?

As the price of gold continues its rapid ascent with no signs of significant falls in the near future, gold jewellers are coming to terms with the fact that the world’s most popular precious metal is destined to become even more precious in coming months

According to GFMS, the world’s foremost precious metals consultancy, the growth in investment demand has been the primary driver of the rally that has taken gold from around $250 in early 2001 to peaks above or close to the $1000 level since early last year.

In the consultancy’s June newsletter, GFMS executive chairman Philip Klapwijk said world gold investment (the sum of implied net (dis)investment, official coins, bar hoarding, and medals and imitation coins) grew from an average of 383 tonnes per annum from 1993 to 2000 to reach an average of 707 tonnes per annum from 2001 to 2008.

He said this change represented a jump in value from an annual average of around US$4 billion to nearly US$12 billion per annum.

According to GFMS, this booming investor interest in gold investment has been primarily driven by:

“The contrast between this economic and financial backdrop compared to that prevailing in the mid- and late-1990s is stark,” said Klapwijk

“Back then the economic environment was characterised by low inflation, high real interest rates and an extraordinary bull market in equities.”

He said that GFMS expects to see a “massive increase” in world investment in the remainder of 2009, especially given increasing fears over the long-term inflation threat in western countries.

Indeed, in its May Quarterly report, the Consultancy has forecast that gold investment will exceed 1500 tonnes or approximately US$47 billion this year “carrying the price to new peaks in the second half”.

On the domestic front gold and gold jewellery wholesalers and retailers are not immune to the impact of the rising price of gold but the effect is not necessarily negative.

For example, Andrew Cochineas, the managing director of the Palloys Group (Palloys casting, AGS Metals precious metal fabrication and Regentco jewellery findings) believes the rising price of gold is unlikely to lead to a fall in gold jewellery sales.

“The obvious conclusion that many people draw is that the higher predicted gold price will result in lower jewellery sales but I don’t necessarily agree with that,” he says.

“As an example, the average ring weighs approximately three to eight grams.  If gold prices increase by a further 20 percent as predicted, the net cost increase will not be substantial and in any event will probably be negligible in comparison to the value of the design, the stones and the labour that also make up that ring.”

In addition, he says research indicates that consumers see jewellery as a “special” purchase – and in most cases, “’special’ equates with ‘expensive’”.

“In other words, consumers are already hardwired into believing that jewellery is meant to be expensive.  What we believe this means is that if marketed correctly, increased retail jewellery prices should not have a negative effect on gold and gold jewellery sales – it really is all in the spin!”

Cochineas says that sales volumes of his company’s higher cartage products have actually increased in recent months as “we are seeing a big move to higher gold caratages”.

He is equally optimistic about gold jewellery sales in the coming month.

“Studies indicate that in times of economic uncertainty, sales of ‘feel good’ items, like perfume, lipstick, alcohol and jewellery can actually increase – if marketed correctly.

“Moreover, in times of economic uncertainty you see an increasing focus towards good quality products that last.

“This can only mean good things for the Australian ‘home grown’ jewellery industry.

“Despite the rising price, consumers will continue to demand gold jewellery and sales will continue as usual.”

Similarly Phil Williams, director of PJ Williams, says the wholesaler’s experience in the last 20 to 30 years has shown that rising gold prices do not automatically lead to a drop in gold jewellery sales – particularly in the middle and upper market.

“When the price goes up the volume of gold used in individual items tends to go down but the total end value of the items stays the same so profit remain the same,” he explains.

“The rising price of gold may can however have a big impact at the lower end of the market where customers are extremely price conscious.”

Conversely Kokozian Jewellery Manufacturing managing director Michael Kokozian is less than optimistic about the rising price of gold on the local market.

“The impact the rising price of gold has on the local Australian Market is astronomical,” he says.

“It has caused the end product to rise in price by a minimum of 35 to 40 percent which in turn has seen a massive exodus in the popularity of gold thus affecting sales.

“In a world where hand made solid bracelets and chains have an average weight of 18 to 35 grams you can see a minimum shift in price anywhere in the vicinity of $300 to $500 while a pair of quality Australian-made pair earrings will have a minimum shift in price by $45 to $65.”

Kokozian believes the GFC combined with the higher price of gold has led to manufacturers changing their products to create more affordable jewellery pieces.

“Naturally during these hard times, people will minimise or stop spending on non- essential items,” he explains.

“Those who are still choosing to buy ‘non-essentials’ will look at cheaper options.

“Most of the local manufactures, my self included, are therefore using different techniques to manufacture either lighter and more cost affective designs, where we are now mixing gold with cheaper metals the main being silver.”

However on a more optimisitic note Kokozian says he has also observed a “slight shift” in consumer interest away from cheaper white metals back to the more traditional yellow an rose gold.

“I am very optimistic that we will see a shift in trend back to the more traditional yellow and rose gold jewellery which will be helped by the stable but high price of gold which we have seen for the last months.”

Jim Short, the managing director of EBS Metals precious metal refiners and casters is equally concerned about the impact of rising gold prices and the GFC on the local market.

“Australia may continue to muddle along better than other countries, but demand for larger priced items will probably be subdued for one to two years,” he says.

”The GFC has had a big impact on the higher-end. For example, the rise in the price of gold has made 10g chains/bracelets seem very expensive at retail – around $500 today instead of say $270 two years ago.

“The GFC will see business and households increasingly shy away from debt, and encourage them to pay off existing debts. This shrinkage will affect all retail as customers
will think twice before buying on plastic.

“Engagement rings and wedding bands will probably hold up and communities that buy gold for baptisms, communions, confirmations etc will still buy but discretionary spending will remain subdued.

“Eventually though, the yearning for a bit of luxury after months of belt-tightening will see sales lift , but this could be one to two years away.”

And when the belt-tightening does lift most wholesalers are convinced that yellow and rose gold will be back in favour.

“White metals have enjoyed the spotlight for many years now and I feel that we are now seeing the tail end of this trend,” concludes Kokozian. “I predict we will see the trend swing towards rose gold over the next year as this seems to be in vogue throughout Europe.”

Cochineas concurs that the biggest trend in the gold jewellery market is the move towards rose golds.

“The increasing demand for rose golds reflects the prevalence of rose and pink golds in the latest European jewellery and watch collections.”